Monetary Disorder In Extremis
Doug Nolan
November non-farm payrolls gained 245,000, only about half the mean forecasts - and down from October’s 610,000. It was the weakest job growth since April’s employment debacle.
U.S. equities rallied on the disappointing news.
A few Bloomberg headlines captured the aura: “Stocks Gain as Jobs Miss Boosts Stimulus Bets;” “Fed Case for Fresh Action Gets Stronger on Soft U.S. Jobs Report;” and “Jobs Data Was a ‘Perfect Miss’ for Fed and Aid.”
Bad news has never been more positively received in the stock market. Some analysts are now anticipating the Fed will soon supersize its already massive monthly bond purchases.
Chairman Powell’s comments this week did little to dissuade such thinking: “We are going to keep our rates low and keep our tools working until we feel like we really are very clearly past the danger that is presented to the economy from the pandemic.”
The U.S. Bubble Economy structure has evolved into a voracious Credit glutton.
There’s a strong case for significant additional fiscal stimulus. The case for boosting monetary stimulus is not compelling. Financial conditions have remained ultra-loose.
Credit stays readily available for even the riskiest corporate borrowers, as bond issuance surges to new heights. While formidable, the remarkable speculative Bubble throughout corporate Credit is dwarfed by what has regressed to a raging stock market mania.
Manic November will be chronicled for posterity. Future historians will surely be confounded. It is being called the strongest ever November for equities.
Up 12% for the month, the Dow posted its largest one-month advance since January 1987.
The S&P500 returned 10.9%, a huge bonanza relegated to small potatoes by the “melt-up” in the broader market.
The “average stock” Value Line Arithmetic Index posted an 18.3% advance in November.
The small cap Russell 2000 also surged 18.3%, and the S&P400 Midcaps rose 14.1%.
Melt-up dynamics were a global phenomenon – “developed” and emerging markets alike.
Major equities indexes were up 25.2% in Spain, 23.0% in Italy, 20.1% in France, 15.0% in Germany, 15.0% in Japan, 10.3% in Canada, and 10.0% in Australia.
In EM, equities rose 19.5% in Poland, 15.5% in Russia, 15.4% in Turkey, 14.3% in South Korea, 11.5% in India, 15.9% in Brazil, 13.0% in Mexico and 20.5% in Argentina.
The Brazilian real and Colombian peso posted one-month gains of 10%, with the Turkish lira up 8.1%, the Russian ruble 7.2%, the Mexican peso 5.9% and the South Korean won 5.1%.
U.S. stocks powered higher on election results. Both American and global investors were apparently enamored with the prospect of a Biden presidency held in check by a Republican Senate. The unwind of hedges played prominently in the market’s advance.
Positive vaccine news then threw gas on the speculative fire.
As equities turned wildly speculative, a historic short squeeze (losses on shorts spurring aggressive self-reinforcing buying to unwind positions) led to major outperformance by lagging sectors.
This dynamic coupled with constructive vaccine news incited a major rotation into underperforming stocks, sectors and indices.
The Goldman Sachs Most Short Index posted a November gain of an astounding 28.4% (vs. the S&P500’s 10.8%).
The Bloomberg Americas Airlines Index also jumped 28.4%, with the Bloomberg Americas Lodging Index up 25.1%. The NYSE Arca Oil Index surged 32.2%.
The KWB Bank Index rose 17.4%, with the NYSE Financial Index and the Broker/Dealers both gaining 16.7%.
From the New York Times:
“In a sign that Mr. Biden plans to focus on spreading economic wealth, his transition team put issues of equality and worker empowerment at the forefront of its news release announcing the nominees, saying they would help create ‘an economy that gives every single person across America a fair shot and an equal chance to get ahead.’”
There’s more than a little irony in former Fed chair Janet Yellen shepherding the administration’s efforts to rectify inequality.
Reuters quoting Yellen:
“There really is a new kind of recognition that you’ve got a society where capitalism is beginning to run amok and needs to be readjusted in order to make sure that what we’re doing is sustainable and the benefits of growth are widely shared in ways they haven’t been.”
Fed policy is singlehandedly the greatest force in propagating inequality, with the past nine months the greatest episode of inequitable wealth distribution imaginable.
Gross monetary mismanagement and financial excess are a principle cause of capitalism running amok.
And how might egregious Fed stimulus measures now be expected to promote a more equitable and moral allocation of our national wealth across society?
Lost in the discussion is the fact that we’re in the throes of a historic experiment in central bank monetary management.
The Fed some years ago abandoned the traditional mechanism of operating chiefly through the banking system with subtle adjustments to reserves and interbank lending rates – a process arguably superior at disbursing resources more proportionately throughout the economy.
Having evolved over the past couple decades, the Fed now executes policy directly through the securities markets.
Policy stimulus enters the system chiefly through massive purchases of Treasury and agency securities, creating liquidity excess for financial markets generally.
Moreover, low (now zero) rates foster stimulus effects through both the promotion of leveraged speculation and by spurring speculative flows into higher-yielding (riskier) securities and other assets.
This failing central bank experiment has unleashed myriad deleterious processes.
Historic speculative Bubble Dynamics have become deeply ingrained throughout the financial markets – equities, Treasuries, agencies, corporate Credit, derivatives, leveraged lending, etc.
In the real economy, increasingly oppressive inequality is ravaging the fabric of our society – fomenting deep social and political division along with economic instability.
This brutal pandemic will run its course.
Meanwhile, a runaway historic financial Bubble poses grave risk to our nation’s future. Inequality creates great risk to social and political stability.
It’s critical to identify and blunt Bubbles early. Wait too long and the mounting risk of reining them in ensures timid policymakers not only acquiesce - but turn increasingly compelled to accommodate Bubble excess.
Today, the Fed doesn’t dare concede even the possibility of destabilizing financial excess, fearing any hint of possible policy restraint risks puncturing a fragile economic recovery.
In a modern version of “trickle down,” policymakers cling to the notion that booming financial markets will promote broad-based economic gains and associated benefits.
It clearly has not and will not. Policy focus almost solely on the unemployment rate is misguided.
There are today extraordinary uncertainties. Markets traditionally hate uncertainty.
These days, markets love the certainty of unrelenting, unprecedented monetary stimulus. A frightening acceleration of Covid, economic fragility, fiscal stimulus uncertainty, political risks, rising Treasury yields, etc. all equate to persistent pressure on the Fed to do more.
“U.S. Infections, Deaths, Hospitalizations All Hit Record Highs,” read a dreadful Friday Wall Street Journal headline.
Shockingly, daily Covid cases surpassed 228,000 (as reported Friday evening by Bloomberg). Nationwide, hospitalizations now exceed 100,00 and continue their rapid rise. Daily deaths are approaching 3,000.
Alarmed by increasingly overwhelmed hospital systems, more states are adopting restrictive measures. Los Angeles and San Francisco Bay Area counties reimposed “stay at home orders”, with the entire state of California on the cusp.
From Bloomberg:
“Pennsylvania reported 11,763 cases, the second consecutive day of record infections. The number of hospitalizations has increased 10-fold since the start of October.”
Alarming pandemic headlines and snippets could go on and on.
December 2 – CNBC (Will Feuer):
“The next few months of the Covid-19 pandemic will be among ‘the most difficult in the public health history of this nation,’ Dr. Robert Redfield, the director of the Centers for Disease Control and Prevention, said… Redfield… said that about 90% of hospitals in the country are in ‘hot zones and the red zones.’
He added that 90% of long-term care facilities are in areas with high level of spread. ‘So we are at a very critical time right now about being able to maintain the resilience of our health-care system,’ Redfield said. ‘The reality is December and January and February are going to be rough times.
I actually believe they’re going to be the most difficult in the public health history of this nation, largely because of the stress that’s going to be put on our health-care system.’”
The S&P500 gained another 1.7% this week to trade to all-time highs. But such gains would bore any purposeful day trader (equities or options).
The Semiconductors jumped 6.1% this week, increasing 2020 gains to 51%.
The KBW Bank Index rose 2.7%, boosting five-week gains to 24.3%, while the Broker/Dealers jumped 3.6% (up 23.1% in five-weeks).
The small cap Russell 2000 rose 2.0% this week, with a five-week gain of 23.0%.
The Philadelphia Oil Service Index jumped 7.8% and 63.2% over five weeks.
The Goldman Sachs Most Short Index gained another 2.9% this week, boosting five-week gains to 33.8%.
Perhaps the single best barometer of epic speculative excess, the Goldman Sachs Short Index has now surged 187% off March lows.
Few strategies have proved as fruitful as targeting popular short positions.
And over recent weeks, the bears have gone from being terribly impaired to pretty much blown out extinct.
Furthermore, the melt-up in heavily shorted stocks unleashed bloody havoc for long/short and other hedge fund strategies, while helping instigate an extraordinary sector rotation.
The pandemic bestowed the Federal Reserve a license to print $3 TN for injection into the markets.
The Fed’s pandemic response granted Washington a license to run a $3 TN plus fiscal deficit (without a whiff of market protest).
And unparalleled monetary and fiscal stimulus gifted markets a license to partake in egregious speculative excess.
With vaccines on the way, no amount of Covid hardship has been sufficient to break the bullish spell ingrained throughout the securities markets.
Zero rates, Trillions of liquidity, and a limitless Fed backstop are as captivating as it gets.
And with the Fed ready to do whatever it takes, no degree of economic impairment is going to jeopardize market fervor.
From the experience of the past nine-months, markets are highly confident that no number is too big when it comes to monetary stimulus.
And going forward, fiscal stimulus shortcomings will surely be remedied by even larger Fed QE liquidity injections.
It’s become an only greater challenge to convince readers that what passes these days as normal is anything but.
We reached a number of precarious junctures over recent years - that came and went like the passing of the seasons.
But let’s not lose sight of historic crazy: speculative excess is by far the most egregious I’ve witnessed in my over three decades of obsessive market analysis.
Not only will it renounce “leaning against the wind” (let alone tighten policy), the Fed is poised to continue injecting $120 billion monthly into Bubble markets as far as the eye can see.
In the face of raging asset inflation (i.e. securities and home prices), the Federal Reserve is apparently more likely to boost QE than to tapper. Crazy.
How might all this end?
There are facets of Credit Bubble Theory to contemplate.
Speculative leveraging is dangerously destabilizing.
Increases in leverage (“securities Credit”) create a self-reinforcing liquidity dynamic, whereby speculation fuels higher securities prices, greater liquidity excess and only more feverish speculative zeal.
As I’ve stated repeatedly, the big problem is it doesn’t work in reverse.
The Fed in March faced a major deleveraging event – the piercing of a historic globalized speculative Bubble. After markets scoffed at their initial responses, the Fed was forced to resort to overwhelmingly forceful crisis-fighting measures.
These reversed the de-risking/deleveraging dynamic.
At that point, the Fed should have scaled back what was clearly exorbitant liquidity measures. Our central bank instead set a policy course that promoted market speculation and speculative leveraging.
The closest parallel would be the wild speculative excess in the face of a rapidly deteriorating fundamental backdrop in 1929.
December 4 – Bloomberg (Katherine Greifeld and Lu Wang):
“The coronavirus is raging again. Whole states are at risk of closure, November payroll growth was anemic and solvency risk is bubbling back up. That stocks could rally amid such a backdrop should probably, by now, surprise nobody.
That it’s happening on the back of firms with the worst balance sheets might. Companies with shakier finances rallied 4.3% over the past five days, beating their sturdier counterparts for a fourth week, the longest streak in 13 months, data compiled by Goldman Sachs Group Inc. and Bloomberg show.
Up 25% since the start of October, the weak-credit group is poised for its best quarter of relative performance since the last bull market began in 2009.”
I believe speculative leverage is greater today than prior to March’s near global market meltdown – in Credit, in equities, derivatives, at home and abroad.
The next major de-risking/deleveraging episode (odds having increased following speculative “melt-up” dynamics) will demand another massive Fed response.
Markets today, of course, enjoy unwavering faith in “whatever it takes.”
But will the Fed be willing to pony up another $3 TN - or even more?
Or was the pandemic a unique policy circumstance not to be extrapolated to future crisis responses?
Moreover, might the sinking dollar have the Fed thinking twice before flooding the system with Trillions of new dollar liquidity?
And it’s worth mentioning recent inklings of inflationary pressures. This week was notable for market indicators (i.e. 10-year “breakeven” rate at an 18-month high) along with elevated PMI Prices components (Services and Manufacturing surveys).
Might a combination of rising inflation and Treasury yields, along with a faltering dollar, encourage the revival of some semblance of moderation from our central bank?
Heresy, I know.
It’s been a longstanding CBB maxim: monetary inflation is not the solution, it’s central to the problem.
M2 “money” supply is up $3.6 TN, or 23% annualized, over the past 39 weeks.
We’re witnessing Monetary Disorder In Extremis.
This has been a long time coming – with the situation now spiraling out of control.
Today’s manias in monetary inflation and market speculation come at a very high cost.
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