Speak Truth to Crazy
Doug Nolan
Before quickly moving on to March and beyond, posterity beckons for some documentation of an extraordinary February.
For the month, Bitcoin surged $18,972 (45%), surpassing October 2021’s previous monthly record gain ($17,540).
Nvidia surged 29%, Meta 29%, Lattice Semiconductor 26%, Coherent Corp 25%, and Applied Materials 23%.
The Semiconductors (SOX) returned 11.1%.
The Nasdaq Composite returned 6.2% for the month, and it wasn’t only tech driving the gains.
The Nasdaq Transports returned 7.7%, Nasdaq Industrials 7.2%, Nasdaq Insurance 6.6%, and the Nasdaq Financials 5.9%.
There were 49 stocks in the Nasdaq Composite that at least doubled in price during the month.
And indicative of the highly speculative market environment, the Goldman Sachs Most Short Index surged 16.6% for the month.
The major indices all posted big months.
The Nasdaq100’s (NDX) 5.4% slightly outperformed the S&P500’s 5.3% return.
The broader market outperformed.
The S&P400 Midcaps’s 5.9% somewhat led the small cap Russell 2000’s 5.7% return.
The “average stock” Value Line Arithmetic Index returned 4.0% during February.
While uneven, global equities generally posted solid gains.
Japan’s Nikkei 225 returned 8.0%, posting a record high for the first time since the bursting of their Bubble 34 years ago.
Germany’s DAX returned 4.6%, France’s CAC40 3.5%, and Italy’s MIB 6.0%.
An abrupt rally saw China’s CSI300 recover 9.4% during the month.
While certainly not as captivating as crypto and equities melt-ups, Credit market developments were no less spectacular.
Following record January issuance of $189 billion, early-month forecasts projected February would approach the monthly record set just last year ($150bn).
As it turned out, February’s issuance of $198 billion crushed the previous record by almost a third.
At about $400 billion in two months, 2024 is off to nothing short of a rip-roaring historic start.
March 1 – Bloomberg (Gowri Gurumurthy):
“The broad rally in risk assets has propelled CCCs, the riskiest part of the junk bond market, to the top as the best performing asset class in February.
Returns for the month were 1.7% after climbing for six consecutive sessions.”
With stunning gains and record equities prices, record corporate issuance, and multiyear lows in corporate spreads and CDS prices, there is ample support for the thesis that market financial conditions have turned the loosest since the mortgage finance Bubble period.
March 1 – Bloomberg (Alexandra Harris):
“Federal Reserve Bank of New York President John Williams said he doesn’t see a need for officials to tighten policy further and reiterated that he expects the central bank to cut rates later this year.
Williams acknowledged that inflation has retreated from multi-decade highs, but he emphasized officials want to see inflation return to 2% and remain there on a sustained basis.
‘I expect us to cut interest rates later this year,’ he said…
‘We’re going to move interest rates back to more normal levels.’”
February 29 – Yahoo Finance (Jennifer Schonberger):
“Cleveland Fed president Loretta Mester said Thursday that the latest reading on inflation doesn’t alter her calculus for three rate cuts later in 2024…
She is still predicting three cuts in 2024, an estimate she first made in December.
‘Right now that feels about right to me if the economy evolves as I anticipate it will,’ Mester said.”
March 1 – Bloomberg (Carter Johnson):
“Chicago Fed President Austan Goolsbee said officials should keep interest rates elevated only until they’re convinced inflation is on track to return to the 2% target.
‘If you look historically, we’re high.
And the longer we stay at that — if inflation continues falling — we’re going to have to start thinking about the employment side of the mandate,’ Goolsbee said… ‘How long do we want to stay in that restrictive environment?
The answer, I think, should be: Only as long as we have to, that we’re convinced that we’re on path to get to the target inflation.”
When you think everyone is crazy, it’s not a bad idea to do a mirror check.
Not looking any younger and overdue for a haircut, but I appear sane enough.
Why do Fed officials persist with all the rate cut talk in the face of persistent inflation, economic resilience, and conspicuously wild speculative excess?
By now, I would hope they recognize that their “dovish pivot” during a market melt-up was a significant blunder.
Yet they continue to throw gas on the fire.
March 1 – Bloomberg (Mohamed A. El-Erian):
“The time has come to discard the excessive data dependency that risks making the Fed too backward looking in its thinking, overly reactive in policy implementation and too narrow in its discussions of economic and financial issues.
Historic data should not be the sole determinant of policy making.
This ongoing obsession with the numbers should give way to an approach that also incorporates strategic vision and forward-looking insights on where the economy is heading.
The extent to which the world’s most powerful central bank succeeds at this may well be the difference between the much-desired soft landing for the US economy and yet another Fed policy mistake that undermines economic well-being.”
I’m no fan of “excessive data dependency” - and am all for the Fed to adopt a sound “strategic vision and forward-looking insights.”
But I part ways with El-Erian on today’s overarching monetary policy issue.
Policies that accommodate asset inflation and speculative Bubbles place economic well-being in peril.
I disagree with anyone who argues the Fed should move forward with rate cuts in the face of extremely loose financial conditions and perilous speculative excess.
Moreover, albeit Fed official or analyst, to neglect the paramount role of financial conditions is to ensure an inferior analytical framework.
March 1 – Bloomberg (Carter Johnson):
“Apollo Management Chief Economist Torsten Slok said that a re-accelerating US economy, coupled with a rise in underlying inflation, will prevent the Federal Reserve from cutting interest rates in 2024.
‘The bottom line is that the Fed will spend most of 2024 fighting inflation,’ Slok wrote...
‘As a result, yield levels in fixed income will stay high’…
‘The market now has to realize that the data is just not slowing down, and the Fed pivot has given an additional tailwind to the economy and to financial markets and financial conditions and to capital markets.
All that is likely to continue to be supporting growth in consumer spending, in capex spending, in hiring for most likely the better part of this year.’”
There aren’t many, but a few analysts are willing to Speak Truth to Crazy.
March 1 – Bloomberg (Simon Kennedy):
“The US national debt is rising $1 trillion every 100 days, helping to explain why assets such as gold and Bitcoin are trading at around all-time highs, according to strategists at Bank of America Corp.
The pace of the debt swelling is also accelerating, the strategists led by Michael Hartnett said in a report...
They estimate it will take just 95 days for the burden to climb to $35 trillion from $34 trillion, compared to the 92 days it took to grow to $33 trillion from $32 trillion.”
Torsten Slok and Michael Hartnett’s notes were delivered to clients on the first day of March, a session that suggested a month potentially crazier even than February.
The Semiconductors surged 4.3% Friday to another all-time high, boosting four-month returns to 50.3%.
Nvidia’s 4% advance increased its four-month return to 94.4%.
The stock closed the week for the first time with a $2 TN market capitalization, joining only Apple and Microsoft in the $2 TN club.
Bitcoin rose another $1,160, or 1.9%, Friday, boosting the week’s gain to a blistering 22.6% - and the four-month gain to 76.5%.
Along with the usual crazies, even commodities markets mustered gains.
The Bloomberg Commodities Index rallied 1.9% this week.
Crude futures jumped 4.5%, with gasoline futures rising 4.2%.
And an interesting thing happened on the day Slok and Hartnett were Speaking Truth: the precious metals came to life.
Gold surged $38.61, or 1.9%, to a record closing price of $2,082.92.
Silver jumped 2.0% in Friday trading, with Platinum up almost 1.0%.
Crude rose 2.2% to trade to a four-month high.
Market dynamics can be fascinating.
I’ve witnessed some phenomenal short squeezes over my career.
They tend to erupt and then take on lives of their own.
Often, there’s a George Soros “reflexivity” dynamic at work.
Surging stock prices invariably spawn bullish Wall Street narratives that entice speculative flows, setting in motion inflating markets, loose conditions, faster growth, and strong company earnings.
Squeeze-related market advances can be powerful catalysts for bullish perceptions that create their own bullish realities.
This dynamic was unleashed with the spectacular “Everything Squeeze” back in November.
The huge short squeeze and derivatives unwind (stocks and bonds) powered a momentous loosening of conditions.
Not surprisingly, economic growth has fueled solid company results, validating the bullish narrative.
But there’s a new dynamic that has not been an issue over recent decades.
In today’s late cycle backdrop, inflation is a serious issue.
A reflexive dynamic sees loose conditions validate the growth and profits components of the bullish narrative.
Meanwhile, loose conditions and resulting market and economic booms conspire to underpin inflationary dynamics.
The bullish Wall Street narrative, premised on inflation quickly returning to the Fed’s 2% target level, only has the appearance of coming to fruition.
The unfolding reality is something quite different: runaway speculative Bubbles and inflation poised to surprise with its tenacity.
After a string of almost universally strong economic data, this week offered more of a mixed picture.
Consumer confidence (Conference Board and University of Michigan) took a hit in February.
ISM Manufacturing was weak (47.8), with New Orders and Employment both down month-over-month.
With the Fed still talking rate cuts, the market responds more to weak data than to strength.
Two-year Treasury yields dropped 16 bps this week to 4.53%.
I’m skeptical that the economy is downshifting.
But when it does, rest assured that bond yields will decline, as the market swiftly prices imminent rate cuts.
And this inflationary bias in bond prices will work to sustain loose conditions, while underpinning economic activity and inflationary pressures.
It has been intriguing to watch a resilient gold price in the face of a bullish narrative of disinflation and booming securities markets.
And then to see bullion break to the upside this week, as Fed officials blatantly disregard loose conditions and runaway speculative Bubbles.
In the “old days,” the Fed would take note of such unmistakable manifestations of overly accommodative monetary policy.
The fixation these days is on the next inflation data.
The Truth is there will be a huge price to pay for all the craziness.
Powell and Fed officials repeatedly assured us that they had learned from history.
They understood the risk of resurgent inflation in the event of premature loosening of monetary policy.
But that’s exactly what they’ve done.
Sure, they can contend that they have held firm with a “restrictive” policy rate.
But the Truth is they orchestrated a dovish pivot and attendant dramatic loosening of conditions.
Plain and simple: they stoked a historic super-cycle market speculative blowoff.
And they apparently cannot refrain from more stoking.
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