The Fed is not listening so step aside

Markets have resumed their slide after a large rebound a couple weeks ago. In my last post I mentioned that the Fed needs to change their tune or else it will risk damaging the economy beyond just a slowdown. So far, no dice. In his last address to the market, chairman Powell gave no indication that the Fed intends to change their intention for further rate hikes. Unfortunately, the Fed looks to be at risk of repeating the mistakes it has made in the past basing decisions on what it sees in the rear view mirror rather than looking ahead of what's in front, not taking early signs of a slowdown/troubles seriously enough. US housing is in a clear slowdown. Inflation has been picking up but it's not by any means run away inflation and with oil prices and commodity prices in general slumping, especially the former,  future inflation figures are bound to come down and therefore the Fed has justification to say "Ok we're not going to be in a hurry to raise rates any further for a while." It doesn't help though that Trump is criticizing the Fed. That  could make the Fed even more resistant to change their tone as I'm sure the Fed doesn't want to give the impression that it's caving in to political pressures. Then of course there's the impact of the trade wars which are starting to bite adding more to the pain. If the Fed doesn't wake up and smell the coffee soon, then things can get really bad.

You have all this hoopla about how positive markets have historically been after a mid term election and the Nov-May seasonality trade. That may have been partly the reason for the markets having such a big rebound. I have never been a fan of  these type of seasonality studies as a good predictor for the markets. Seasonality has very little tangible connection to the drivers of the stock market -it's not much better than astrology if you ask me. And always remember the motto of this blog. If lots of people are putting on the mid term election/seasonality long trade there is good chance it won't work or not work as easily as expected (down big first then up).

So is this the end? Is a bear market nigh? It could very well be but if the Fed blinks and if the US and China broker a deal to end the trade war the bull case could very well be back or at the very least there would be a rip roaring rally. I continue to remain agnostic about the market as I have been all year. I can see the risks to both the bull and bear case here but the bears are getting the upper hand. During times like this the permabears tend to come out of the woodwork and their arguments tend to look convincing when the market is declining.  Don't get brainwashed by these broken-clock is right twice a day clowns. A lot of these people are just miserable fucks. This is not to say you should ignore bearish arguments....just take them with a grain of salt and be open minded to the contrary.

Markets sending a message to the fed....will they listen?

Since my post the market climbed a little higher before succumbing to a sharp drop which is being blamed primarily on the sharp rise in long term interest rates. Although I describe the move up in rates as "sharp", the 10 year yielding 3.2% is still quite low historically speaking, however, corporations and individuals have been been used to low rates for quite some time and so any notable increase in rates will have an impact.  You also have to look at the flips side of higher rates which is that it's a benefit to lenders but overall history would suggest it's a net negative for the market when there's been a prolonged rise like this. I believe the current rise in rates could be digested by the economy and not derail it IF the fed can back off and signal that they are done hiking for the time being. Higher rates appear to be taking a bite into the economy as per the continued slowdown in housing which I warned about last post. Just look at the home builder sector as per XHB..,shambles. Trump has been critical of the Fed and more importantly the market has been critical. It appears that the Fed's motto is this "we'll keep raising rates until something breaks. " which is a fucking stupid philosophy. As Cramer recently said, the Fed is willing to burn down the village so that it can save it later. The Fed should be proactive and anticipatory. Rates have gone up a considerable amount since 2016. Yes, they are still historically low, but you need to give the economy time to adjust. And there is no sign of run away inflation either. The internet and globalization has really put downward pressure on inflation and people have constantly underestimated this impact.

Cramer has been sounding the alarm bells hoping that his message will be heard by the fed. He's got enough pull for them to hear it, but will they change their tone? I think they will. I think ultimately memories of 2008 will make them and I think that the lower the markets go in the short term, the better off it they will  be in the long term because a weak stock market will give the Fed a nice hard slap to the face to stop hiking.

As I predicted before, I don't think the Fed will hike in December or if they do they may signal it will be the last one for a while unless they turn out to be blind, stubborn numbskulls...which maybe they will turn out to be.

Bull Market hits new high....barely....but watch out for slowing housing

There's a lot of media attention lately about how the bull market made a new milestone by hitting a marginal new high and is now 3454 days old, but as I type this the market has since reversed a bit off those highs. Articles that discuss the bull market point out how it's been met with skepticism all throughout it and the funny thing is that it  has been these same media outlets that have fueled that skepticism with their constant negative articles. I've been documenting it here for years about how the financial media has been poo pooing this bull run since day 1. So then, should we view this widespread acknowledgement of the bull market as a contrary indicator signaling  the end of the bull market? I think that's being too cute but it could very well mark a temporary top.

At the ultimate top I expect there to be a full embracing of the bull market. We saw a glimpse of that in December and January but the correction that followed quickly extinguished it. We saw heavy fund flows from Nov- Jan turning negative and flat since February and that's a good thing if you want to have that wall of worry rebuilt for the bull market to climb on. I was hoping to see more volatility throughout the summer to put the market in better position to push through the January peak but it didn't happen. It would seem to me that if we continue to rally here the odds of false breakout would be high but when it comes to making short term calls like this I'll admit that I can certainly get it wrong. I've made some good calls and bad ones too when it comes to the short term and that's natural because the shorter the time frame the more that randomness plays a factor. It's more important to get the long term trend right.

Something that's not really capturing the financial media's attention as much as it should be is slowing housing in the US which probably can be attributed to higher rates. This is very important as most recessions tend to originate from a housing downturn, not bullshit like what's happening in North Korea, Turkey, Italy or what Trump tweeted at 3am while taking a dump. At the very least, a slowdown in housing will put the brakes on US growth and if the Fed is slow to realize this and they keep hiking rates, it can turn the slowdown into outright contraction and that can eventually tip the economy into recession. With oil prices and commodity prices moderating and with memories of 2008 still relatively fresh, I think there's a decent chance the Fed will be able to see the risks of continuing their expected rate hike path and they put a stop to it much sooner than people are expecting. Everyone is expecting another 2 rate hikes before the end of the year and more to come in 2019. I think the expectations for 2019 will be proven dead wrong and we may not even get a hike in December. But I'm not going to hold my breath with the Fed as history shows they can certainly get it wrong when it comes to turning points in the economy. It will be an interesting next few months...

Recession in 2020? Don't bet on it

Since my last post we saw the market decline a little bit and then stage another rebound. Markets have been going sideways for the last 4 months. Bears will say that the market is topping while bulls will say that the market is just consolidating after that torrid run from September to January. I'm siding with the bulls at this point. What I see here is a market that is adjusting to a higher interest rate environment and with the economy showing no material signs of stalling with inflation still under control it's too early to say that the economy has hit a cyclical peak which would usher in the next recession. I still think there is a reasonable possibility of some scare in the market in the coming months that sends it below the 200 DMA and really flushes out weak holders. That type of cleansing would go a long way to propel the market to significant new highs. Of course, the market doesn't always give us what we want or when we want it.

I also think that the prospect of 3-4 rate more hikes by the fed won't happen...at least not as quickly as the market is pricing in. It simply seems too much too soon especially when the rest of the developed world i.e. Europe still hasn't followed suit. I think the Fed is a lot more mindful of the consequences of raising rates too quickly and inverting the yield curve.

I've been hearing/reading  a lot about how the consensus view from economists is that a recession in going to happen in 2020. When have these "experts" as a whole ever correctly predicted a recession? The answer is never. Given the motto of this blog which by now you should be a believer in after the countless number of times the market has humiliated the consensus view, we should expect a recession well before or well after 2020. What would be more surprising? To me it would be the latter.

Another thing I keep hearing/reading a lot about is how we are late in the cycle and that we need to position portfolios accordingly? Really? Were these same people telling you 6-7 years ago that we were early in the cycle and that you should be super bullish about the market? Of course not. The consensus has been chronically underestimating this bull market cycle from day 1. Yes, there have been times when the consensus felt bullish like what happened in late 2017 but the market corrections that followed extinguished such bullishness and turned it back to cautiousness/pessimism and we are seeing this process play out right now however I don't believe we have reached an extreme yet. Deep down people are looking over their shoulder for the next bear market/recession and like I said, I believe it will either happen a lot sooner or a lot later than 2020 unless the consensus view shifts in the future.

If we go back to 1994 and 2004 you will see that we are similar phase in terms of the interest rate cycle whereby rates were rising for the first time in years from recession low levels. The markets had turbulence during those 2 years and basically traded sideways the entire year. Once the market sensed that the economy was able to handle the rate hikes without stalling much and that the fed was going to stop raising rates for the time being, the markets took off again to make new highs.

I ask myself, where could I be wrong here? Didn't we see some classic signs of a bull market top like the cypto bubble bursting and the January blow off top fueled by a mad rush into ETFs? It's certainty possible but my gut says to be skeptical because that could very well just have been a flash of euphoria and there's room for more before we truly reach an extreme. I never got the sense from the media or from the investing public that they have truly, fully embraced the bull market. Plus, monetary conditions are not tight which is what you also see at the peak. What the January peak could very well represent is similar to the 1987 peak whereby structural bull market conditions were still in tact (growing economy, non-tight monetary conditions) but investor optimism got too high and Mr. Market had to punish them. When the market hit bottom after the 1987 crash, optimism turned to deep pessimism.  People feared a recession and even a depression would be immanent as comparisons were being made to the crash of 1929.  Perhaps we will see this type of deep pessimism before this consolidation phase that started in January has truly run it's course.

Market in precarious position

Since my last post we saw the market have a strong rebound as I expected which was got totally undone which was also expected. With the SPX now at the 200 DMA there could be a knee jerk bounce again but I wouldn't hold my breath. I don't expect this downdraft which began in January to be over until we see true capitulation and fear. I suspect we will ultimately get a break below the 200 DMA and all these technical and momentum types get shaken out. As I mentioned in recent posts, the bullish herd expects the yield curve to go inverted to signal the end of the bull market and that created complacency. It looks like Mr. Market  plans to make fools of them or at the very least punish them with a 20%  decline to get enough people to believe that the bull market is over before it resumes course.

We have to also consider the possibility that the bull market has indeed peaked and we are in the early stages of a bear market. As I said before, I didn't see all the conditions that would suggest this to be the case but who's to say that the market is going to give you everything you want to see? That is seldom the case. Major trend changes happen by surprise and that by definition means unexpectedly.

 I would call myself market agnostic at this point. The bull case is not dead by any means. What we could be seeing now could be reminiscent of 1994 and 2004 which were periods when the fed was normalizing interest rates which eventually created turbulence as the market became concerned that the fed would go too far. In addition, as rates go up it makes stocks relatively less attractive as a competing asset class and it lowers intrinsic values of equities as the present value of cash flows are discounted at a higher rate and rising rates results in higher borrowing costs. On the flip side, higher rates implies an improving economy and provides higher income for savers and those are positives for stocks and so you get this tug of war action because of these pros and cons.  Ultimately though,  it's rising interest rates that have killed bull markets and so the more the fed hikes the greater the chance that the negatives will outweigh the positives and I think we reached that tipping point in favor of negatives. One of things I think we need to see happen for this rout to ultimately end is when the fed changes its tone and starts hinting at the end of this rate hike cycle or at least a prolonged pause which led to the end of the routs in 1994 and 2004.

The possibility of a full fledged trade war between the US and the rest of the world is also weighing on the market. As of now the tariffs being imposed by all are not significant but the concern is that things could escalate. Last year people feared that Trump would hurt the markets and they were wrong or at least premature in this fear but now it seems that Trump is purposely poking the hornets nest to create attention for himself in some sick way and it's starting to spook investors. As I said a few months ago, political risk could be something that actually matters this year. So, you have a combination of risking interest rates, rising political/trade turmoil coinciding when people have piled into ETF index funds like lemmings at a time when the market was overbought on multiple time frames 9 years into a bull market. Not good! It will take some time but I believe that the lemming stampede into to ETF index funds will get undone and we will see a lemming stampede out of them at some point this year which could crater the market. 

The purpose of the market is to make fools of as many men as possible.

What a February it's been so far.  Bubbles popping galore. Crypto bubble pop, weed bubble pop, short VIX bubble pop and perhaps ETF bubble pop. Markets have taken quite the dive and we got the fabled 10% correction that so many have been calling for since the summer. While there is certainly concern out there, I don't get the sense of doom like in previous corrections and that's a big problem. The message that seems to be out there is "relax it's just a correction the economy is fine". Sorry, but that's not what long term bottoms look like. "Now is a time to hunt for bargains"says Cramer. Not what long term bottoms look like. Fed chief Dudly calling the drop "small potatoes". Not what a long term bottom looks like. Trump calling the drop "a big mistake". Not what a long term bottom looks like. That's what you call complacency. What you need is fear.

Throughout this bull run that began in 2009 there was usually a wall of worry for it to climb upon. There was always some concern, some issue that kept people from fully embracing the market and that wall of worry is what a healthy bull market needs to climb upon because concerns/worries  keep expectations low and as they get resolved the markets adjust by moving higher. Coming into the new year that wall was crumbling as the prevailing consensus was that it was blue skies ahead as the global economy was experiencing synchronized growth. Near the most recent peak, the market got extremely overbought on multiple time frames, sentiment as per AAII and other measures were at extremes and there was a surge in fund flows. So, has this 10% correction cleared out these extremes? Not so, at least not yet. There has been a pullback in bullishensss and there was a decent outflow last week, but I don't think that's enough. If we are to assume that the bull market is still in tact, before it's ready to resume its upward march on a sustainable basis I expect to see the opposite of what we saw at the peak. I expect to see bears outnumber bulls 2:1, major outflows and the permabears coming out of the woodwork claiming that the bull market is dead. Notice that the permabears have been fairly quiet. Where is Roubini? Where is Prechter? Pretty quiet  now after having their asses handed to them for 9 years calling a crash at every turn.

The other question I ask myself is "did we see actually see the bull market peak"?  Not all the signs were there but some were. Most bullish strategists seem  to think ""there's no inverted yield curve and so not to worry about a recession and therefore major decline in the market". As the motto of this blog goes, the purpose of the market is to make fools of as many men as possible. Once there is a consensus about something there will come a point where too many people are positioned the same way and eventually Mr. Market pulls the rug from underneath their feet. Major declines always catch the majority by surprise. So maybe we don't get a recession but we do get a major decline anyways like in 1987. Or we do get a recession and a major decline? Either of these scenarios would catch the herd by surprise.

In the short term the market is oversold enough to have a rebound but I would be very careful in assuming that it's anything but a dead cat bounce  until we have seen the extremes that marked the top get completely reversed. I don't know how long that could take. When you start seeing headlines saying "the bull market is dead" and people are fleeing from stocks that's when you'll know a real bottom is close.

The good news about the crytpo bubble bursting

It's clearly game over for crypto. I said before that the sooner the crypto bubble pops the better. News about crypto ETFs being pulled and credit card companies beginning to ban it is a GOOD thing (although I was hoping for  an ETF rollout so that I could buy puts on it). The longer this crypto mania would have continued the greater it would have infected the general economy when the inevitable collapse happened. Hopefully the fallout to the economy will be minimal although it's tough to say at this point how much unwinding of leverage and capital destruction this will result in. I for one will NOT take this fallout lightly. I really need to find out what kind of damage this has resulted in.