Irrational Exuberance 2.0

Absolutely nothing has changed since I last wrote about this market in June of 2014. If you haven't read it, you can read it here. The stock market bubble continues to grow, with new all time highs (ATH) being made daily, with no pullbacks, and extremely low volume. We rally on bad news and even higher on good news. Absolutely nothing can drop the market, and if it does drop, it gets saved from the dip buyers or various Fed verbal interventions. Take the latest Greek episode, where any good news we rallied hard on, but any negative news didn't faze the market one bit. In 2010-2012 when Greece was in the news, the market would swing at least 2% on negative news.

Janet and the clowns at the fed have yet again warned about the stock market valuations being sky high, ie a bubble, yet the markets continue to levitate to new highs. It's funny in many ways. First, what they don't realize, is that they have created a Frankenstein market, and they've lost control. Second, they warn about the valuations being too high, yet any time the market drops they jump in to save it with various verbal bullshit. They would never say it, but the stock market is their 3rd mandate. All of their efforts have been to boost asset prices (ie stocks etc) in hopes of creating a trickle down effect, but it hasn't worked, and will never work. And on top of it all, the Fed put together a team led by Stanley Fischer to spot asset price bubbles. That's right, after keeping interest rates near zero for almost 7 years and various QE programs creating the biggest Fed bubble of them all, they put together a team to try and spot bubbles they created. Go ahead and laugh. This is now the third Fed induced bubble in 15 years that will blow. Meanwhile we have yet to lift off the zero bound, with 7 years now of ZIRP, yet cheerleaders claim we are in a recovery.....


And yet everyone and their mother is still calling for higher rates for the 4th year in row. It's funny because if you call for a correction in the equity market and it doesnt happen you get shamed. But for bonds, where yields have done nothing but go lower, despite calls from prominent banks and strategists for a 10-year 3 or 4% end of year rate, they are not made fun of. If you talk down the stock market, you are treated like a moron, and will be accused of sandbagging american prosperity, brushed off as a alarmist, or crazy conspiracy theorist. Yet, history has shown us that extended periods of low rates has always led to a massive boom and bust, but this time it's supposedly different? In my opinion, with domestic and global economic data continuing to worsen, and with global yields (especially EU yields) far lower than the U.S., U.S. rates should head lower.



Some will have read the last paragraph and immediately say to themselves that we have growth and that we are in a recovery. Are we? That's why we have had 4 versions of QE, 7 years of ZIRP, and GDP for 2014 came in at 2.5%, down from 3.1% in 2013? We have also had 2 negative GDP prints since the last crisis, despite all the stimulus. Macro data has collapsed to the weakest since July 2011, and Personal spending is slowing significantly, there is no wage growth, worst back to back retail sales plunge since Lehman, and the Labor force participation is at 35 year low. Then some will tell you that the Labor force particpation rate is that low because of retirees, but if you look at a graph of workers aged 55 and older, you can clearly see that this is false. Others will tell you that the quality of jobs is great, but fail to tell you that these so called quality jobs are in the leisure and hospitality sector, ie waiters etc. Since the crisis, there have been no new net jobs created. Housing is heading back lower, despite 3 attempts from the Fed to give it a boost. With mortgage application rates and refinancing activity near the lows, what better time then now to re-introduce sub-prime loans and cut requirements for landing a mortgage as we are seeing currently playing out. Everyone seems to forget what happened last time......


 


And now the ECB has announced it will be launching its own QE program beginning this month, which has led to a surge in European stocks and a massive drop in European bond yields, as everyone and their mother is front-running despite the fact that there are not enough bonds to buy. What people do not understand, is that QE will be ineffective to spur growth in the EU, and it will be a failure, just like the QE experiments in the U.S. and Japan. What people do not understand, is that printing money to buy bonds doesn't put people back to work, and it doesn't produce goods and services. Printing money manipulates asset prices and creates instability. Earlier this year, Mr. Irrational Exuberance himself: Alan Greenspan, publicly came out and said that "[QE] didn't do much for the real economy." Even Richard Fisher came out and said "QE was a massive gift to the rich" that has widened the income inequality in the U.S. to a new record.

Meanwhile if you browse CNBC, Bloomberg, WSJ, Marketwatch or any other mainstream financial network, you will see a bunch of posts trying to justify the Nasdaq levels, and how it's different this time. In the last few days on Bloomberg radio, they've had 3 people come on to defend the Nasdaq 5000 level. For example, one guy said "Just because Nasdaq keeps going up, doesn't mean it's a bubble." Another gentlemen said "This time it's different because of fundamentals." But the best I've heard was a guy saying "This is not speculation. This is a normal Bull market." $17 trillion in global central bank liquidity injections since the crisis & zero to negative rates driving risk accumulation doesn't make this a normal bull market. This is the most artificial bull market the world has ever seen. In a December WSJ article, the author wrote something quite eye-popping: "There are at least 48 private U.S. Companies valued at $1Billion or more by venture-capital firms, versus 27 at the start of the year. That is a record number--during the dot-com boom in 2000, there were 10 such companies." In Tuesday's WSJ, they had two separate articles talking about the Nasdaq and how this time it's much different. Just look at valuations which continue to rise to beyond stupid levels. Just look at the valuations of apps like Tinder, Uber, Snapchat, etc. who are getting valuations north of $18 Billion without a dime in profits. Uber's latest valuation is $40 Billion. To put that into perspective, that is greater than 250 S&P listed companies! Biotech valuations are also at alarming levels, as the WSJ recently noted. Some of these companies blatantly have said they have no business plans or plans on turning a profit in the near future. How is this any different than during the last tech bubble? If you want a reminder of why it is all the same, just read this wikipedia page on the dot-com bubble http://en.wikipedia.org/wiki/Dot-com_bubble .

Brief list of casualties so far from the Tech Bubble 2.0:

GoPro (GPRO)-59% from highs

AliBABA (BABA) -33% from highs

Twitter (TWTR) -36% from highs

RocketFuel (FUEL)-86% from highs

Rubicon Technology (RBCN) -88% from highs

Zynga (ZNGA) -85% from highs

King Digital (KING) -37% from highs

Lending Club (LC)-31% from highs

Tesla (TSLA) -31% from highs

Wayfair (W) -36% from highs

Yodlee (YDLE) -28% from highs

Veeva (VEEV) -33% from highs

TrueCar (TRUE) -29% from highs

Five9 (FIVN) -55% from highs

AeroHive (HIVE) -62% from highs

Everyday Health (EVDY) -34% from highs


Here we are, early 2015, and we have people boasting about how the bears or pessimists got it wrong saying that when QE would end, markets would reverse. They weren't wrong. What they don't mention, is that since the FED's QE program ended, Japan and the ECB launched/announced their own programs. Japan announced it's QQE program literally 2 days after the official end of the Fed's QE program. Mix that with over 20 central bank rate cuts so far this year, with some going as far as negative rates.  Mix that with the various stick-saves everytime the market drops. For example, in October when the market finally was about to touch an official 10% drop, St.Louis Fed President Bullard said the most absurd comment, that the Fed should reconsider ending the QE program, despite the fact it was officially ending at the end of the month. Well markets exploded and haven't looked back since.

In my last post in June, I talked about the Japanese economy and the drastic failure of Abenomics and BOJ policy. Things have only gotten worse since then, despite the BOJ launching QQE on October 31st with a very close 5-4 vote. Since the inception of Abenomics in December of 2012, the Nikkei is up over 9,345 points or 101% in a little over 2 years. During this same span of time, Japan re-entered recession, saw a record number of corporate bankruptcies due to the weak Yen policy, the longest trade deficit in 60 yrs, and a massive drop in retail sales and household spending.

Talk has re-emerged of a bill to audit the Fed. This of course has led to many members of the Fed to come out swinging, with Janet Yellen saying that she would "forcefully oppose" an audit and that "central bank independence promotes better economic performance." Better economic performance you say? That's hilarious, because they have created more boom and bust cycles than at anytime prior to the Fed. Then you have Senators like Bob Corcker who said that auditing the Fed would be "harmful to the free world." Harmful to the free world who has suffered from ineffective Fed policies, and a Fed that has repeatedly missed every crisis it has helped create.  What is harmful to the free world is a closed group of academics, with no real experience, meeting to discuss and alter monetary policy that affects everyone globally. What is harmful to the free world is the Fed having closed door meetings with various Congressional leaders and discussing monetary policy! And just remember, this is the same Fed, whom we just found out last October, that has a 'doomsday book'.

What keeps me up at night, is wondering how this will all end. And in my honest belief, I think it will end in tears, and it will be worse than any crisis we have experienced. What people and central bankers do not understand, is that you can't devalue your way to prosperity. Absolutely nothing has changed since the last crisis. The same too big too fail banks have only gotten much bigger. The same people that were in charge leading into the crisis and during it, are the same people who are in charge of fixing it. New regulations were established to try and regulate the industry, but they will be proven to be ineffective. Why? Because the Volcker Rule and Dodd-Frank have had all the important elements removed, thanks to the massive lobbying power of the TBTF banks and the Fed.