JohnT
March 9, 2020, 2:35am
101
One of my favorite Twitter follows is Sven Henrich, founder of NorthernTrader.com . He wrote a fascinating piece today… let me quote:
We’re faced with the most critical time since the financial crisis. That’s not my opinion, this is what the $VIX says. It’s behaving in a very unusual and rare way and everyone better pay very close attention. When I made the $VIX 46 call in January it seemed like an idiotic call to make for $VIX moves into the 40’s are extremely rare. But it happened and $VIX hit 46 a week ago and now on Friday $VIX hit 54 before again reverting below the trend line I had originally drawn in January (see Big Calls).
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Last week’s panic rate cut by the Fed was a complete failure. Again the Fed misread the market and the incompetence is stunning. On February 20 and 21 Fed speakers were arrogantly cheerleading and arguing no rate cuts were necessary. Two weeks later they panic cut. The Fed has been wrong and chasing reality for years now. Everything they’ve done has been in response to markets, the balance sheet roll-off was a failure and now they have expanded to record treasury holdings, their rate cuts since 2019 have all been ineffective and now coronavirus, which in fairness they couldn’t have possibly seen coming, is wreaking havoc on the entire market construct.
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Nobody can blame the Fed for the coronavirus, but what I will blame them for is the asset bubble they have created. The multiple expansion they unleashed on markets in 2019 and into early 2020 were a complete reckless disaster and now we’re possibly staring at the greatest bull trap ever.
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The risk: That some funds are getting wiped out and over-leverage and unpreparedness and fear among retail investors will cause the calm passive investing trend to turn into ‘get me out at all cost’ panic selling. A systemic deleveraging the likes of which we have never seen before. And then it wouldn’t matter if the virus situation improves. The damage will already have been done, companies would have to tighten belts, lay off people and the business cycle would turn in earnest:
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Markets recently reached higher valuations than even during the 2000 dotcom bubble. We were at 159% market cap to GDP just a few weeks ago, but now we have the highest debt levels ever on top of that. A credit bubble with the highest corporate debt ever. The consequence:
This is not 2000, this is not 2008, this is an entirely different beast here. And it’s angry. Very angry. And these next few weeks/days even hours may be absolutely critical.
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The big macro concern remains the same: Let’s take the longest and slowest recovery business cycle & the most indebted global economy, use cheap money to jam markets to the highest market cap to GDP valuations ever and then shut down the global supply chain and then let’s see what happens with central bankers having the least ammunition available in any cycle.
So let’s also be clear: There is clearly an opportunity for control to be re-established. Central banks have managed to control volatility every single time it reared its head since the GFC. But right here and now they are challenged more than ever since the crisis. This is very binary. They either retain control or not.
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Bottomline here:
We’re witnessing the most profound challenge to central bankers since the GFC. Their appeasement of markets since 2009 has left us all vulnerable. The constant subsidy of markets and the economy as led us to the largest credit and asset bubble in our lifetimes and the architects of the monstrosity have left themselves weak and depleted. They are now begging for fiscal stimulus from governments that are traditionally slow to react. The big bazookas will come the question whether it will be too late.
The bolded part is something I’ve been telling people: The stock market has remained “up” (until recently) because the Trump Administration has been pumping liquidity into the market, primarily through the old standby RBMS* purchases. Trump has understood that the DJIA is used as a form of shorthand with how well the economy is doing, and his administration has been doing all they can to keep the market afloat.
However, there’s only so much bullshitting you can do and there’s only so much bullshitting people will accept. And the time for bullshit is about over, if it’s not already.
*Resident-Backed Mortgage Securities.