Strange and bizarro days indeed! We had a set up that was quite precarious and dangerous that could have turned into something very ugly. As I warned in my last post the central banks will not go gently into the night. With only a five day decline of 4.5% they completely freaked out and trotted out Fed Governor Evans from Chicago who said “If we raise rates now it would be a catastrophe.” Magically futures ramped and we are off to the races again.
I was talking to a technical guru on Tuesday night and he said the Fed is likely to intervene soon because this market has the potential to just fall apart. It was creepy how quickly he was proven right. If you are a bull you need to ask yourself does Evans statement and timing make any sense whatsoever? Why would it be a catastrophe? Why his very precise timing for a statement into a mere 4.5% decline?
Lets get real for a moment shall we. Something is not right here at all. By their actions, I now believe that the Fed is absolutely petrified of what they have created and for some reason they can’t seem to just let it fall apart now. Why do they keep levitating this market? What are they waiting for? They must know that eventually they will fail and what they are doing is only making matters worse. The speed of this market is very concerning. I think they fear a crash in equities similar to what is happening in oil. The volatility we are about to see this year is going to be epic. After this intervention it is clear to me that we are going to get spinal tap “it goes to 11” volatility. Strap on your hard hat because we have just entered the danger zone.
Why have they stopped QE? The economy is not better. Clearly without QE the asset markets fall apart. Do they think Japan and the ECB can carry the water? Or is there something more nefarious going on here? I will wax philosophical on this subject in a few days. There is definitely something happening here- what is is ain’t exactly clear yet. What we are witnessing is the greatest illusion of all time.
The Fed will need to constantly try to prevent a market collapse more and more often. I expect more Evan like actions to be the norm going forward.
The 10 year bond yield has had a 10% decline in the first 4 days of this year which is the biggest move ever recorded for a start to the year. Dana Lyons pointed out that the second biggest move we had at a beginning of a year was in 2008 and it was 5%. This is why the Fed is freaking out. However they continue to talk about an economic recovery. I got news for you we never really had a true one and the spell that most of the investing public is under is about to be broken. The recovery was driven by a credit reflation that produced mal-investment that can’t possibly produce enough cash flows to service the debt. You see deflation was always built into the cake. It was only a matter of time until it became visible to us. Bonds are screaming deflation. Most of what you read about our economy or see on TV is garbage. Watch asset prices as they tell the real story. Bonds and commodities are veritas while stocks are a mendacium. Stocks will be joining the veritas club soon enough.
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Wow .Great piece. I will comment
on this later as I’m being forced to
leave the house. Really ,really need a
haircut.
nice call there BearStar !
Not really talked about much, but copper and iron have been screaming recession for some time. You can’t look at the price of iron ore and think that there is a great resurgence in manufacturing that is being talked about, as it did worse than oil in 2014, but no one noticed since iron companies were never ‘sexy’.
Had an interesting conversation with a friend who asked what I thought was a safe haven for money, and I told him I honestly didn’t know. Bail-in’s seem like they are in the cards everywhere now, so other than land, or some insulated private equity I don’t really know where you could stash money to outlast this. Even cash seems risky due to the risk of bail-ins. Any thoughts on this subject?
Also, what do you make of the “when will the fed raise rates” nonsense? Anyone with the most basic excel skills can math out that is would make the debt impossible to service, what is the out here?
How can you say the US economy is not getting better? Employment, consumer spending, credit growth, corporate profits, fiscal budgets, capital markets, and even wage growth is improving. The issue isn’t the US, the problems lie in Europe and Asia in my opinion. The Fed passed the baton to the ECB and BOJ because the US proved that QE worked (US financial balance sheets repaired, employment grew, inflation kept normalized, capital markets opened up, GDP growing). The problem is that the market isnt confident that the Europeans will do what is necessary (QE3 type QE) and will instead do some kind of useless QE program that looks like QE optically but will not be nearly large enough to appease the markets. I’m starting to take of risk because of potential volatility due to the ECB decision coming up, but I still don’t understand how people can say that US economy isn’t improving.
Have you looked at the type of jobs that are causing ‘job growth’ or into how unemployment is actually calculated?
Yes I have, and I know the job growth trajectory has been lower than historical post recession periods, but it’s still growing.
Denninger’s take
http://market-ticker.org/akcs-www?post=229715
Blue, why are bonds “screaming deflation”?. Is it because investors willing to loan money to sovereigns at near ZIRP or NIRP rates of return says that all other asset classes are going to erode capital? Trying to understand the macro or intermarket view.
juice,
i love your avatar. thanks.
tjwp,
When I figure that out i will let you know. I think the play is long US bonds, short stocks. after the crash and QE4 begins get long stocks again and maybe gold. Also I suggest you make a small investment in an AR Colt 6920. 😉
Ahh yes the now all to familiar mendacium. Love it.
Good piece Blue, and good point on the cash flows to service the debt.
The question will be how far this will fall. They have pushed it pretty high so there is some breathing room.
If they start chirping at -7.5% (Bullard) and -4.5% (Evans), you are right they are nervous and there’s a lot of hedgies that want to make up for the past few years of crap returns.
Question is where do they step in? At what level does the Fed Put come in? When it does QE4 will be nuclear in size that’s for sure!
Forgetalpha,
The economy has gotten only marginally better with only $4 trillion in QE and it is not sustainable. The energy bust just wiped out all the high paying jobs from energy over the last 5 years. The real economy is lower than the 2007 peak but yet asset prices are higher. That will correct. Look I am not zero hedge that has been calling for a crash since 2009. I started getting negative last year. The sign posts are all around us. The economy can not survive without QE. QE is over…so is the economy.
ecchymosis,
Thanks. Very interesting.
cwinsor,
If we were actually growing bond yields would be risings and the yield curve would be steepening. Inflation expectations would be rising. They are actually going in the opposite direction. Forget the cnbc narrative and watch bonds for they always lead and they are veritas.
Jimmy,
They need some sort of cover to do it. I would guess greater than a 20% correction for more QE. Absent that they will Jaw bone us to death hence the volatility.
Blue,
I can’t own those up here in Canada unfortunately, but I make due:
http://world.guns.ru/userfiles/images/shotgun/sh17/rem870mcs_18.jpg
http://media.liveauctiongroup.net/i/14221/14395649_1.jpg?v=8CF9142B69841F0
I just wish we could at least get a 20% correction in equities. It’s stupid as to why we keep melting up stretching the rubber band further and further until it pops and 50% down commeth
Danny1980,
I absolutely agree. These idiots have really screwed this up. Corrections are healthy as they allow sentiment and leverage to unwind.
forgetalpha- I think for a lot of middle class folks this improved economy just means they will probably keep their jobs, but will not be paid any more, And excluding gas right now, the cost of living keeps creeping upward, unless not eating enough is OK.
As well known- the price shenanigans at the grocery store, clothing prices, etc impact the middle and lower economic classes much harder because these expenses are a larger portion of their income.
Earlier in my life when my income was higher, I never looked at the prices at the grocery store, and I didn’t care how much a custom shirt cost, if I wanted a few.
Ok well you’re definition of marginal improvement must be much different than mine because here are the stats.
2014 was the best year of job growth since 1999, adding 3 million jobs, leaving the unemployment rate at 5.6%, the lowest since 2008. Emplyoment was also broadbased, even in december with job growth in construction, manufacturing, and restaurants, as well as the broader sectors which have seen growth since 2010.
GDP grew 5% in 3Q, the fastest pace since 3Q 2003.
US GDP was $14.47 trilion in 2007, as of last quarter GDP was $16.8 trillion.
GNI per capita was $48,480 in 2007, now its over $54,000
Food inflation increased to 3.1% in November 2014 vs. the historical average of 4.25% frm 1968-2014
Industrial production grew 5.2% last quarter YoY vs. average historic growth of 3.8% (and vs. 1%-2% in 2007)
US Corporate profits increased to $2.1 trilion in 3Q14 vs. $1.5 trillion in 2007
Consumer sentiment hit 93.6 in December approaching the highs of 2007 (vs. the lows of 2008-09 which hit the mid 50’s).
US disposable personal income increase to $13.15 trillion in November vs. $10.5 trillion in 2007
What more do you want?
@Alpha, not arguing your numbers. How about labor participation rates, and a hint of wage gains?
If we don’t think we have soup lines we are kidding ourselves. The cash is deposited right into your account while you stand in line at WMT at midnight at the end of each month.
Also how about number of peeps on food stamps?
just sayin’.
The economy and job growth are doing great .I know the stats are massaged for sure but all stats are ,private and otherwise . Ask around ,people are working . New jobs are like adding a successful product line . Now you need a warehouse guy and a receivables person etc. It builds on itself. Now the
market is way ahead of the economy
and that’s the problem. But it will catch up just not as fast as all the Q.E lovers want. Give it a year. In the meantime both bulls and bears can profit-fly is up
6 and blue is up 5- The play is in the volatility.
First, thank you all for giving me something to think about, in order to consider my attitude and thought process.
My basic point is those excellent economic numbers should not be extrapolated to say that everything is great, across the board for the entire population.
I get and agree that there will be winners and losers in life. I’ve always believed that people are foremost responsible for their economic situations. In my case the good and bad times are completely the result of my own actions, I take responsibility.
No, we should not save the middle class or the poor. But neither should we imply everything is great because the metrics of the upper economic class are doing well.
I don’t know the answer, but God bless the wealthy. Seriously. If they are doomed we are all screwed.
Of course they are nervous. If you are driving to NYC from LA; you sure as hell better not let the car run out of gas in WV
Forgetalpha works for the government. He’s a mole.
Real wage growth happens when a job that paid $15.00 and hour now has to pay $17.00.
These days, wage growth comes when 40 jobs that used to pay $20/hour get turned into 90 that pay $10.
That is wage growth in government math.
Now, with the ACA about to drive the dagger into the heart of job creation (small business) we can expect even more of the same.
Saw an ad in a local paper for the company that manufactures highway posts and electric poles this week. $9.00/hour starting wage. After 6 months you get healthcare (co/pay). Max wage for the position was $12.00.
That doesn’t cut it in the real world but in government math that job is counted on the + side of the ledger.
Bogus math.
Heaterman, wage growth has been disappointing without a doubt, but the reason wage growth has been stagnant is because there was a tremendous amount of slack in the labor market. Wage growth is the last domino that has to fall for the US economy to have real solid momentum, hence the Fed’s focus on the weaker than expected wage growth in December. But from a market perspective, that’s actually bullish because it means rates are going to be low until the Fed sees >2% wage growth. The labor market is much stronger and tighter now than it has been in years.ACA may cloud the speed of that recovery though as employers have to seriously weigh the cost/benefit analysis of taking on full time employees.
I’m not saying that we are rip roaring and everyone is doing great. There are definitely wide pockets of the country that aren’t seeing the benefits of this growth compared to others, but like gorby said, this recovery will start to build on itself and spread into the lower-middle income families through better job opportunities, lower financing rates, lower gas prices, and hopefully higher wages.
I just see way too much pessimism on these pages from investors who are blinding themselves from opportunity because of their negative opinion of the Fed & QE. I’ve been reading the same diatribe about the Fed for years now, and ironically, those who were the most convinced that the Fed was driving us into the abyss, happened to miss the fact that the economy was gradually improving in a low rate environment…i.e the most ideal environment for a stock market rally you can ask for.
The scars of 2008 haven’t healed yet for some investors, and unfortunately the belief that another crisis is right around the corner has hurt far more investors than it should have.
This blog is becoming a seriously terrific
place to exchange views .
Forget alpha,
I agree with many of your points, however, being an investing trading site, I think it’s worth noting that the markets appear to have priced in all of the growth you mention and then some. Markets have significantly surpassed the highs from 2007 and yet, we have only recently regained all of the jobs lost in the Great Recession. everything cycles and we are already long in the tooth.
Woops sorry. The above post is mine, I was trying to reply to forget alpha and mistakenly I out his name in the “name field”
More King Dollars are needed globally to service all of the dollar denominated debt. Need another 4 – 6 trillion to put the amount of US reserves at about 10 trillion. Can’t do it until after 2016 election. When the bond market sees that the QE bonds will be used to pay for our unfunded liablilities such as Social Security, Pensions, State and Local Gov’t Pensions, & Medicare/Obamacare INSTEAD of being loaned out to the private sector, we could see a bond bubble burst and the FED finally gets its wish for higher rates. (Extra Armstrong!)
So what if interest rates start to climb without some real and serious economic growth taking place? There is no possible scenario in which the debt could be serviced if interest rates climb without significant improvement in the economic well being of middle class wage earners.
That is never going to happen with almost 50% of citizens receiving some form of assistance via the federal government.
I’ll believe there has been real economic growth when I see wages start to come up instead of dropping and businesses are once again competing for workers across the board.
If interest rates rise now or
even if people believe they
are going to rise then Blue
will make enough dough to fly
us all out the islands.
Here is an interesting take on where the US could see wage inflation in the next few years. If you don’t want to read it, he essentially lays out the scenario playing out in the costruction/transportation labor markets…i.e there are secular growth drivers on the demand side for construction/transportation infrastructure, and the supply of labor in that pool is set to decline as older workers retire without an adequate pool of younger workers to take those jobs, so wages will grow in order to attract a wider group of workers to those sectors. Good stuff
http://csen.tumblr.com/post/107700146224/the-biggest-looming-source-of-inflation
ForgetAlpha,
Thanks for your stats. What jimmy two times said. Plus this was a credit inspired boom just like the the housing boom. Credit booms always end in busts. Always. No exceptions.
gorby,
Try to be like gretzky and go to where the puck is going not where it has been. The economy has peaked! Why? Credit creation is peaking. End of story. Some day grasshopper you will snatch the pebble from my hand.
Greg,
The next panic will be a rich mans panic.
heaterman,
Thanks. My stats professor said he could twist numbers to give the desired answer. Remember the misery index? “The misery index is an economic indicator, created by economist Arthur Okun, and found by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.”
The unemployment rate is bogus. And the inflation rate is bogus. As the cities explode into violence this year and next we will see the true misery index.
Forgetalpha,
I am not a Fed hater. I made a lot of money from 2009 to 2013. Now I am bearish. I will get bullish again don’t worry. Perma bears are depressing. The founder of CollapseNet killed himself. But the Fed has created credit that has led to mal-investment here and abroad which will lead to another severe recession. This is basic cycles stuff. Don’t over think this. I started blogging on May 7th. Its has been seven months. We have been witnessing the beginning of a topping process.
Gorby,
Gorby said “This blog is becoming a seriously terrific
place to exchange views .”
Ditto
nocurne,
QE4 is inevitable.
Forgetalpha,
Thanks for the link.
To all:
Thanks for the responses. I am glad everyone has been so civil. Now lets make some dough this year.
On another note: The “growth” we have seen since the financial crisis very simplistically in large part has been from the doubling of the debt of the US under Obama. Much of that debt has been transfer payments in the form of assistance to those who were ravaged by the financial crisis. Since 70% of our economy is consumption Corporate America has literally been subsidized by the government in addition to the largess from the Fed’s easy money. I ask you all this question: Can “growth” like this be sustained and what multiple do you put on this growth? Remember it took the country 231 years to amass $9 trillion in debt-that number has been doubled to $18 trillion under Obama and the great welfare state in 6 years. We are screwed. The credit party is over. Time to pay the piper.
BlueBear: what u think of this cycles guy current analysis?
http://www.thedocument.com/Why-I-Believe-a-Bear-Market-Has-Begun.1188.1.htm
As the cities explode into violence… dude.. you just lost all credibility.
Juice,
Cycle stuff is hard for 95% of the investing public to understand. This man is correct. I have been watching this set up at well. If October low is breached then we have capped the 4 year cycle. Also know this- the fed understands this as well. That is why they freaked out last week. I expect a well placed comment from them or a proxy very soon.
Trader confessions,
I never had any credibility. 🙂 Seriously though the market does not need violence in cities to go down. However I believe it will happen. Maybe you have not noticed what has happened in New York these past few months.
I will agree that if credit becomes much harder to obtain(we
know the oil patch is screwed for a while)
then yes ,its gonna be a very hard landing and we will take off the silk
housecoat and put on that really
ugly bear suit.
What has happened in NY these past few months that is related to what you are discussing… the economy and jobs? If Americans were predisposed to violence it would have occurred in 2008.
traderconfessions,
Lets agree to disagree. However, I believe the two are related. The protests in NY would have zero legs if people were gainfully employed. People with jobs do not have time to roam the streets and shut down the city. Let’s take your optimistic view and hope I am wrong. I like your outcome better. I just call them as I see them.
Your argument is absurd. You really believe that the protestors in NYC were all unemployed? Do you live in NYC?
@trader “If Americans were predisposed to violence it would have occurred in 2008.”
now that is absurd statement. this is not a mkt causation/correlation.
I think all Blue is trying to say is that the base exists for civil unrest. A lot of people under/unemployed. Idle hands are tools of the devil.
trader confessions,
of course not all these people were unemployed. many are under employed. but you seem to miss how pissed off folks are these days. and it does not matter what the event is that gets them riled. the event is irrelevant. the conditions are there. Yes i lived in NYC years ago. great town. However it has peaked and is on the decline. Go bother the Fly.
There’s a difference between pissed and kick the dog and pissed kill your neighbor.
NYC real estate prices are at all-time highs so I guess some feel the place hasn’t peaked yet. Now I’ll go bother Fly about his HABT.
What a beautiful sight to see AMZN leading the way here. I put my whole portfolio into various short aetups last week. This time is different!!! (regarding dip buyers always winning out)
Quality control,
AMZN is on its way to $200.
Completely agreed on the PT. I think earnings will the catalyst for the bulk of the move.
Can you offer any words on how you position for, ride gains and eventually cover through a correction/crash. Do use index puts or position via individual stocks? Do you scale, pyramid, trim and trail, etc.?
Shorted YHOO at about $49. Lot of space underneath. Seems overdue for a pullback.
BlueStar:
And one more thing -I can’t get that tune out of my head.
traderconfessions
Haven’t you notices the soup lines in NYC?
Ok, actually the soup lines are in the supermarket with their food stamp cards.
“There’s a difference between pissed and kick the dog and pissed kill your neighbor.”
Few intend to kill their neighbor.
Kick the dog; ouch, he bit me back.
Now your pissed. And so is he…
You’ll be amazed how fast the veneer of civility can come off in hard times.
Did you think the arab spring was political? (food riot)
I’m not saying this will happen here; but it’s certainly not impossible.
http://www.caseyresearch.com/lg/meltdown-video
You would do well to consider carefully what BlueStar is saying.
that guy from casey research offered my buddy a job. ha- terrible pay
Blue – http://online.wsj.com/mdc/public/page/2_3022-mfgppl-moneyflow.html?mod=mdc_leader
I’ve never seen a SPY buy on weakness number this big … something is up .. rally around the corner
If I had to venture a guess, I’d say that oil is gonna bounce taking the market up bigtime
Quality control,
I am short IWM through march puts. I have been holding since Before the swoon in December. I should have covered then. I will be more proactive taking profits this year. Short AMZN cash now and will add puts into earnings. I plan on really getting short once we have structural confirmation, absent that i still have lots of cash and TLT.
Quality,
Yhoo is over. Baba catalyst done.
gorby,
catchy tune and very relevant to today.
Juice,
Thanks for the heads up. Should be interesting.
Blue thanks for the insight. This action today has to trouble Bulls. This STFR decline is among the faster we’ve seen intraday. RUT off nearly 30 points in a couple of hours!
If that USD/JPY breaks down overnight look out below. I honestly think we could see another assume gap tomorrow and at this point I’m thinking down.
I think Gundlach read this post before making his 2015 outlook which is going on right now. The last 5 slides essentially covered the points brought up in the comments section lol. Not kidding
ForgetAlpha,
Well done gang!
With the way futs, dollar/yen, crude and copper are trading tonight I am anticipating a fed stick save tomorrow. Who will they parade out tomorrow? Looks like Plosser is scheduled to speak. I’m sure they’re editing the beige book as we speak.
Quality control,
I agree.