One Serious Silly Season
Doug Nolan
Just another week in Bizzarro Bubble World.
Trump and Powell, donning construction hard hats, bicker in front of the cameras about the cost of the Fed’s refurbishment project.
The spectacle made for interesting headlines:
AP: “Trump and Powell publicly bicker over renovation costs as president pressures central banker.”
NYT: “Powell Fact-Checks Trump on Cost of Fed Renovations.”
FoxNews: “Trump tours Federal Reserve, confronts confused Powell about renovation price tag.”
CNN: “‘It’s not new’: Jerome Powell corrects Trump over building plan.”
I have to say, if I was looking to hire a construction worker, President Trump appeared so much bigger and stronger.
But unless you have a screw loose, you go with the scrawny guy to oversee monetary policy (for the next 10 months).
Entertaining as it was, the extraordinary construction-site Trump and Powell encounter still lost the news cycle to The Return of Meme Stock Madness.
Bloomberg ran with simple:
“Meme Stocks are Back.”
Business Insider: “Historic Short Squeeze Drives Latest Meme Stock Rally, Goldman Sachs Says” and “Here’s ChatGPT’s Advice on How to Sport the Next Meme Stock.”
CNBC: “Meme screen: Heavily shorted small stocks that are starting to rip this week.”
It’s worth noting that the Goldman Sachs Short Index rallied 71% from April 9th intraday lows to Thursday’s intraday highs.
Yahoo Finance:
“Meme stock rally has investors feeling ‘invulnerable’ as speculative bets power markets at record highs.”
The article quoted Interactive Brokers’ chief strategist Steve Sosnick: “I think more and more investors are feeling somewhat invulnerable right now.
Everything they’ve been trying has been working for them.
If the basic stuff’s working, why not try a bit more speculative stuff.”
Or a lot more…
MarketWatch: “‘I’m already up $45,000 in about an hour’ — Reddit traders boast about wins as meme-stock mania returns.”
Bloomberg: “Five-Cent Meme Stock Makes us 15% of Trading on US Exchanges.”
Bloomberg: “High-Risk Currency Trading Is the New Meme Stock for This Retail Crowd.”
NYT: “The Stock Market’s Most Unserious Season Is Back and Dorkier Than Before.”
July 24 – New York Times (Rob Copeland and Kailyn Rhone):
“The fever in financial markets over ‘meme stocks’ is back and stranger than ever. Just how strange?
So strange that on Monday, for no singular reason, shares in a medley of beaten-down companies suddenly soared as small-time investors bought up stocks that mainstream Wall Street analysts and investors had long given up on. It got odder on Tuesday, as that tsunami of trading intensified and the shares of four companies briefly doubled in value.
Krispy Kreme (DNUT), Opendoor (OPEN), Rocket Mortgage (RKT) and Kohl’s (KSS) had become the meme stocks of the moment, along with a new moniker from traders — ‘DORK,’ a reference to the first letters of their tickers.”
July 24 – Axios (Madison Mills):
“Meme stocks are back, with GoPro, Opendoor and Krispy Kreme rallying double digits this week thanks to retail investors and Reddit threads.
The retail resurgence is the latest signal that investors are willing to take on more risk, as stocks keep hitting record highs and it gets harder to beat the broader market.
‘The environment is just kind of ripe for it.
We’re seeing it in crypto as well,’ Tom Bruni, editor in chief of Stocktwits… told Axios.
The meme stock rally comes as other parts of the market, from the broader index to bitcoin, are also hitting record highs.
The meme stock craze kicked off during the pandemic, when stimulus checks coupled with time at home to scroll through Reddit threads led to a retail trading boom.
Amy Wu Silverman, an equity derivatives strategist at RBC, told Axios that moment represented a ‘sea change’ that hasn’t gone away, though there have been fits and starts of mania since 2020.”
Indeed, “a sea change that hasn’t gone away.”
And it won’t go away until the bursting of a historic speculative Bubble inflicts painful – behavior changing – losses on the crazed masses of retail, institutional and professional speculators.
There’s no cure for a Bubble.
They feed off loose conditions – and won’t go quietly.
Great care must be taken to ensure they don’t materialize.
It is crucial to deflate Bubbles early, before they gain momentum and alter market, financial and economic structure.
July 24 – Bloomberg (Denitsa Tsekova and Carmen Reinicke):
“It was once a symbol of rebellion against the well-heeled Wall Street establishment.
Today, it’s just another day in markets.
This week proved the point.
Opendoor surged 43% in a single day.
Krispy Kreme rallied 39% in a matter of hours.
GoPro briefly spiked 73%.
Reddit message boards lit up once again with rocket emojis and call-option bravado.
Yet it wasn’t the magnitude of the surges that mattered — but the indifference they met.
Customary warnings about speculative excess fell on deaf ears.
What once felt seismic now feels like a normal part of daily trading — another episode in a US financial system where bursts of retail speculation are routine, expected, and largely unremarkable.”
Important perspective from the above Bloomberg article:
“Peter Atwater, an adjunct professor at the College of William & Mary who studies retail investors, said the current wave of activity reflects a shift in both market sentiment and investment toolkit.
Meme stocks trading, he says, has lost its sense of novelty — and that’s precisely the point.
‘We’ve normalized memeing,’ he said.
‘There’s a yawn to it now.’
In Atwater’s view, the most aggressive traders have already moved on to riskier frontiers – digital tokens, leveraged ETFs, prediction markets — while meme stocks have become more of a cultural rerun’…
Contracts that expire within 24 hours made up a record 62% of the S&P 500’s total options so far this quarter…, with more than half of the activity being driven by retail trading.”
It might be somewhat less than obvious.
We’re numb to it anyways.
But Bubble excess has taken another fateful lurch to the great unknown.
We’re witnessing the consequences of decades of Bubble mismanagement – that these days has all the mesmerizing appearances of epic wealth creation and permanent prosperity.
And at this point, risks associated with the bursting of such a monumental Bubble ensure the Fed doesn’t dare move to rein in excesses.
Meanwhile, the administration is pulling out all the stops to stoke Bubble inflation (i.e., crypto, AI, deregulation, private markets…).
President Trump is precisely why central bank independence from political pressure is so fundamental.
There was more than a little irony this week, with President Trump again demanding lower interest rates, despite conspicuous evidence of loose financial conditions and precarious market excess.
Of course, candidates to replace Powell (Hassett, Warsh, Waller and Bessent) are all calling for rate cuts.
But what is Mohamed El-Erian thinking?
Not only has he called for a rate cut next week, he's also saying Powell should resign.
Appeasement would set a dangerous precedent.
It's now been 10 months since the Fed commenced its 100 bps rate reduction.
This policy error will surely escape future historians.
The Federal Reserve aggressively loosened monetary policy during a period of loose financial conditions and intensifying market excess.
Perhaps there’s an argument that overheated finance can be disregarded when an economy is in trouble.
But that was clearly not the situation last fall. In their case to discredit the Federal Reserve, the administration today argues that politically motivated cuts were meant to bolster Biden/Harris.
There was more evidence this week suggesting loose financial conditions have growing potential to fuel upside surprises in economic activity and inflation.
The preliminary July Services PMI Index jumped to a stronger-than-expected 55.2, the highest reading since last December.
The Services Employment subcomponent posted its fifth straight gain to the strongest reading (52.6) since January.
Prices were also higher.
And more indications this week of reemerging labor market tightening.
Initial Jobless Claims declined for the sixth straight week.
At 217,000, claims are within a thousand of the lowest level back to early-February.
Last year’s argument was that the policy rate was significantly above the so-called “neutral rate.”
This would be a problematic analytical framework even in a non-Bubble environment.
Arguably, at this overheated Bubble phase – massive fiscal deficits, unprecedented leveraged speculation, booming equities markets, rapidly inflating “private-Credit” and crypto Bubbles - it would require a meaningfully higher policy rate to restrain financial excess.
Aggressive risk takers – in the markets, throughout finance, within corporate America, and all around the economy – have achieved success.
They now confidently dominate positions of power and influence.
Risk aversion has been virtually eradicated.
In the stock market, the retail “buy the dip” crowd has never been so emboldened.
Trading options is easy money.
For free money, simply squeeze the lowly shorts. FOMO (fear of missing out) ensures portfolio managers fear cash holdings are their greatest risk.
Meanwhile, with the exception of mortgage debt, the Credit system is firing on all cylinders.
July 21 – Bloomberg (Rachel Graf):
“About $61 billion of US leveraged loans hit the market Monday, the second-most ever…, as junk-rated borrowers continue rushing to lower borrowing costs by repricing existing loans.
There were 33 launches…, with all but six of them repricings.
The largest was a $7.57 billion offering for medical supplies giant Medline, the bulk of which will be used to reprice a term loan.”
July 25 – Bloomberg (Gowri Gurumurthy):
“US junk bonds are headed for their second week of gains after steadily rising for six straight sessions…
The broad gains were… partly fueled by large cash inflows into US high yield funds in 11 of the past 12 weeks.
The funds reported a cash haul of more than $900m for the week ended July 23…
CCC yields, the riskiest tier of the junk bond market, dropped to a three-week low of 10.66% after steadily declining for four sessions.
CCCs are on track to rack up their seventh week of gains, the longest streak since October…
The market priced nearly $9bn in four sessions this week, making it the busiest week since mid-May.
The month’s volume is $27.5b.
This will be the busiest July since at least 2021.”
July 24 – The Bond Buyer (Jessica Lerner):
“Fears about changes to the tax exemption, shifting macroeconomics, growing capital needs and inflation-induced added costs to complete projects… led state and local government issuers to bring debt at a record pace, with issuance already on track to break 2024’s record $500-plus billion.
The volume currently stands at $310.166 billion, up 17.4% from $264.151 billion at the same time last year. Now that the second half is underway, several firms revisited their supply projections for the year…”
Give the bond market Credit for maintaining composure.
It’s actually not all that atypical for the bond market to disregard crazy stock market excess.
While speculative equities markets turn quite short-term focused, bonds tend to hold a longer-term perspective.
Bonds can watch stock market exuberance and crazy meme stock speculation, and take comfort that the end is nigh.
Global bond markets continue to appear vulnerable.
European bonds, in particular, rallied Monday in what appeared a curious reaction to the Japanese election (unwind of hedges?).
But yields were back up by the end of the week.
German 10-year bund yields, at 2.72%, closed the week a basis point from the high since the end of March.
But it’s the Japanese bond market that deserves special focus.
July 23 – Reuters (Rocky Swift and Gregor Hunter):
“Japanese government bonds tumbled on Wednesday, sending benchmark yields to near 17-year highs, as traders priced in increased political risks and a hazy outlook for the central bank's policy normalisation path.
In a sign of how nervous markets are, the Ministry of Finance’s first sale of super-long government debt since a bruising electoral defeat for Prime Minister Shigeru Ishiba logged the weakest demand in almost 14 years…
The 10-year JGB yield jumped as much as 10 bps to 1.6%, marking its biggest move in months and the highest level since October 2008.
Super-long term JGB yields hit record highs in May and are back near those levels…
‘We’re seeing a possible buyers’ strike playing through,’ said Chris Weston, head of research at broker Pepperstone.”
July 24 – Bloomberg (Alastair Gale, Ruth Carson, and Anya Andrianova):
“Since World War II, Japan has built a reputation as a global safe haven for investors in part due to a consensus-driven political system helmed by one of the world’s most successful big-tent parties.
Now the center is unraveling, testing much of what has held true about the nation for decades.
An election in Japan’s upper house earlier this week showed the ruling Liberal Democratic Party losing ground to a range of opposition parties, all broadly united by anger over prices rising at the fastest pace in more than 20 years.
Yet one in particular was the talk of the town in Tokyo: Sanseito, a right-wing populist party pushing a ‘Japanese-First’ agenda.
During the hot summer days leading up to the vote, its candidates railed against foreigners, opposed same-sex marriage and made spending pledges that pricked the ears of investors already on edge about looser fiscal management globally.”
While their politics are notoriously messy, Japanese society has traditionally been the poster child of cohesion and stability.
Japan is now suffering from similar insecurity, angst, divisiveness, and nationalism, which has afflicted nations from the U.S. to Europe to the world more generally.
For those that dismiss Bubble risk, it’s worth contemplating that Japan still suffers from its late-eighties Bubble.
It felt lonely commending Japan’s post-Bubble policy responses.
Perfect they were not, but Tokyo at least avoided doing anything crazy stupid.
That is, until they succumbed to Ben Bernanke’s inflationist sophistry.
Predictably, the scourge of inflation has undermined Japan’s coveted social order.
Now the Ueda Bank of Japan faces extremely difficult decisions.
Do they tighten monetary policy to contain inflation and underpin society - when higher rates risk triggering a bond market crisis?
And with Japanese finance such a key source of investment and speculative flows for markets globally, what happens in Tokyo won’t stay in Tokyo.
July 25 – Bloomberg:
“China’s central bank pumped a sizeable amount of cash into its financial system Friday, a move seemingly intended to stop a bond selloff gaining momentum and destabilizing financial markets.
The People’s Bank of China put in 601.8 billion yuan ($84bn) of short-term cash via reverse repurchase agreements, the largest daily net injection since January.”
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