Post by Marya Dabrowski on Apr 16, 2020 11:33:37 GMT -5
Don't Fight the Fed?
You are witness to something never before seen in history. The obvious is the worldwide shut down. That's in your face, as everyone's living it, and it's not a secret. But there's something else going on... a war, a financial fight of epic proportions. And most people don't realize it.
The market is holding up amazingly well considering the world is locked down. One might wonder how that can be. Surely earnings are going to stink, and aren't earnings based on sales? Well there aren't any sales that generate revenue and thus profits. Isn't the market supposedly marked to earnings, so we can price discover if a stock should go up or down? Yes, that's the way it's supposed to work.
But all that's on hold now. All the rules you grew up with are out the window. Earnings are worthless now. Nothing matters but the Fed.
Let me tell you a little story about how the "ripple effect" of this virus event is so much wider than folks know or understand.
My wife has leased a little Mazda 3 for the past 3 years, for her business. It's a cute little thing and it's a hoot to drive. It's quick, handles very well, and gets stupid high gas mileage. So, the lease is up, and she's decided we'd like to keep it.
So she calls Chase (the outfit that financed the lease) and says "We like the little car, so instead of turning it in, just roll it over to a loan for the balance and we'll keep it, like we did with the last car."
The lady on the phone says, "Nope, we're not writing loans at this time. You'll have to shop your own local bank if you wish to keep the car." Holy crap. She's leased this for 3 years, never a late payment, 812 credit score. Nope, doesn't matter, we ain't lending.
So the point I'm making, obviously is that all this hope of the economy coming back quickly once people can go back to work is baloney. Why won't this bank lend to a lady with a perfect credit score and more credit history than most? Because they don't think they'll get paid back. What if you lose your job? What if the place you worked, is closed for good? Nope, they aren't taking the chance.
Now, imagine that playing out across the country. I'll stay with the car leases for a few minutes. I don't have the figures, but I have to think that on any particular month, tens of thousands of leases come due. Well, if the leasing companies aren't going to finance the balance so they can keep the car, they've got to turn it in. Well, what if they can't turn it in, it's over the miles and don't want to- or can't pay the penalty? What if that is their only car and need it? What then?
That's just the situation with a leased car. Imagine the same situation concerning new cars, or worse, housing. Already we're hearing that loan provisions to buy a house have tightened up considerably. Many lenders have already said that if you don't have a credit score of 700 or higher WITH 20% down, don't even bother coming in. They won't talk to you.
Well that wipes out an enormous amount of people. Remember folks, we're in a nation of paycheck to paycheck people. Many are subprime. Most don't have 400 bucks for an emergency, let alone 20% down on a 150K house.
On and on this sort of thing will ripple. We are going to see a very significant recession, and it could be much worse than 2008. Millions more will be unemployed. Thousands of restaurants will never reopen. Sports stadiums? Good luck. Banks don't want to lend, yet our nation is built on credit.
When you add all that up, you come away KNOWING in your heart that this stock market is heading to DOW 4000, right? I mean it has to, right? There's no earnings! The economy is locked down! Millions are unemployed! Supply chains are broken! Banks don't want to lend! People have no savings! It must crash, right??
Well, take a listen to what JP Morgan's head strategist has to say about that:
JPM's Kolanovic
When it comes to market developments, we believe that the Feds action last Thursday represents a pivotal moment in this crisis. Powell's statement included that "we will continue to use these powers forcefully, proactively, and aggressively, until we are confident that we are solidly on the road to recovery.'
Probably the important and most historic statement was this: "We should make them whole. They did not cause this."
This crisis is different from any other in recent history in that it was not caused in any way by businesses or investors. Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone "whole."
We believe the significance of this developement is underestimated by markets and this reinforces our view of a full asset price recovery, and equity markets reaching all time highs next year, likely by the first half. Investors with focus on negative upcoming earnings and economic developments are effectively "fighting the Fed" which was historically a losing proposition.
So there it is folks. This gent figures that the Feds will print so many trillions and buy so many assets that it doesn't matter that the nations locked down. Doesn't matter that earnings will be lousy. He figures they'll "make everyone whole."
This guy isn't some crackpot. This is a big wheel at JPM. Is he just blowing smoke so people buy the market, and JPM has someone to sell their stocks to? Or, does he really believe that the Central banks can indeed buy it all?
The tenant of the Central bank was chartered to say that the Fed would be the lender of last resort. Well, since 2009, they became the lender and the buyer of last resort.
I remember watching CNBC one day back in the 2009 time period. The Feds had all manner of "programs" running to resuscitate the markets which had crashed. Marc Faber of the Gloom,boom and Doom report came on for an interview and he said something very profound. After talking about what the Feds were doing, he stated that "they're going to buy it all, they'll own everything."
It seemed preposterous. Yet even way back then, we knew he was right. The economy never recovered from the 08/09 crash, it was simply papered over. And since we never recovered, now that we're in another crash situation, they've got to escalate their lending and buying scheme to levels unheard of.
So, here we are. Every fiber in your body says that this market is destined to fall to levels unthinkable. Yet the Feds stand willing and apparently able to not let that happen. Can they pull it off?
Let's say they can. Somehow they simply print so much money that the equity markets, the debt markets, simply don't implode. How can they scale out of that? They can't. They haven't been able to scale out of the programs they already had in place, let alone the trillions more they've pumped in the last few months.
Or consider that maybe JPM's Quant is simply wrong. Maybe this is simply the mother of bear market bounces,and like many of the past will evaporate? Nobody regretted not buying the Nikkei Average after the initial 30% decline in 1990 because the Japanese market continued the downtrend for much longer - admittedly with intermediate powerful bear market rallies. It finally bottomed out in 2008.
Similarly, from the March 2000 top the NASDAQ 100 dropped 40% to an intermediate low in May 2000 (two months after the top). From this intermediate low, a 3-month 41% rally followed, which led to renewed, severe, stock weakness and brought the NASDAQ 100 Index down to the ultimate low at 795 in October 2002 (down 83% from the March 2000 high). I guess that nobody really missed anything for not buying the NASDAQ 100 after the first initial decline.
I don't have the answer. But to be totally honest with you all, I have no choice but to entertain the idea that they've learned how to manipulate the markets to such an extent, and the ability to print such enormous sums, that it is possible that instead of a fade to much lower levels, we do climb back to the highs.
I'm not on board with it. I just suggest that it is possible. Considering it was Fed programs, low cost easy money, and stock buybacks, that took the markets from DOW 6,000 to DOW 30,000 in 11 years; and despite the lowest growth rates ever during that run, maybe they can pull it off.
If they do, we'll have something else to ponder. As Mr. Faber said so many years ago, "They'll own everything!" At that point, what is America like? I shudder to know.
You are witness to something never before seen in history. The obvious is the worldwide shut down. That's in your face, as everyone's living it, and it's not a secret. But there's something else going on... a war, a financial fight of epic proportions. And most people don't realize it.
The market is holding up amazingly well considering the world is locked down. One might wonder how that can be. Surely earnings are going to stink, and aren't earnings based on sales? Well there aren't any sales that generate revenue and thus profits. Isn't the market supposedly marked to earnings, so we can price discover if a stock should go up or down? Yes, that's the way it's supposed to work.
But all that's on hold now. All the rules you grew up with are out the window. Earnings are worthless now. Nothing matters but the Fed.
Let me tell you a little story about how the "ripple effect" of this virus event is so much wider than folks know or understand.
My wife has leased a little Mazda 3 for the past 3 years, for her business. It's a cute little thing and it's a hoot to drive. It's quick, handles very well, and gets stupid high gas mileage. So, the lease is up, and she's decided we'd like to keep it.
So she calls Chase (the outfit that financed the lease) and says "We like the little car, so instead of turning it in, just roll it over to a loan for the balance and we'll keep it, like we did with the last car."
The lady on the phone says, "Nope, we're not writing loans at this time. You'll have to shop your own local bank if you wish to keep the car." Holy crap. She's leased this for 3 years, never a late payment, 812 credit score. Nope, doesn't matter, we ain't lending.
So the point I'm making, obviously is that all this hope of the economy coming back quickly once people can go back to work is baloney. Why won't this bank lend to a lady with a perfect credit score and more credit history than most? Because they don't think they'll get paid back. What if you lose your job? What if the place you worked, is closed for good? Nope, they aren't taking the chance.
Now, imagine that playing out across the country. I'll stay with the car leases for a few minutes. I don't have the figures, but I have to think that on any particular month, tens of thousands of leases come due. Well, if the leasing companies aren't going to finance the balance so they can keep the car, they've got to turn it in. Well, what if they can't turn it in, it's over the miles and don't want to- or can't pay the penalty? What if that is their only car and need it? What then?
That's just the situation with a leased car. Imagine the same situation concerning new cars, or worse, housing. Already we're hearing that loan provisions to buy a house have tightened up considerably. Many lenders have already said that if you don't have a credit score of 700 or higher WITH 20% down, don't even bother coming in. They won't talk to you.
Well that wipes out an enormous amount of people. Remember folks, we're in a nation of paycheck to paycheck people. Many are subprime. Most don't have 400 bucks for an emergency, let alone 20% down on a 150K house.
On and on this sort of thing will ripple. We are going to see a very significant recession, and it could be much worse than 2008. Millions more will be unemployed. Thousands of restaurants will never reopen. Sports stadiums? Good luck. Banks don't want to lend, yet our nation is built on credit.
When you add all that up, you come away KNOWING in your heart that this stock market is heading to DOW 4000, right? I mean it has to, right? There's no earnings! The economy is locked down! Millions are unemployed! Supply chains are broken! Banks don't want to lend! People have no savings! It must crash, right??
Well, take a listen to what JP Morgan's head strategist has to say about that:
JPM's Kolanovic
When it comes to market developments, we believe that the Feds action last Thursday represents a pivotal moment in this crisis. Powell's statement included that "we will continue to use these powers forcefully, proactively, and aggressively, until we are confident that we are solidly on the road to recovery.'
Probably the important and most historic statement was this: "We should make them whole. They did not cause this."
This crisis is different from any other in recent history in that it was not caused in any way by businesses or investors. Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone "whole."
We believe the significance of this developement is underestimated by markets and this reinforces our view of a full asset price recovery, and equity markets reaching all time highs next year, likely by the first half. Investors with focus on negative upcoming earnings and economic developments are effectively "fighting the Fed" which was historically a losing proposition.
So there it is folks. This gent figures that the Feds will print so many trillions and buy so many assets that it doesn't matter that the nations locked down. Doesn't matter that earnings will be lousy. He figures they'll "make everyone whole."
This guy isn't some crackpot. This is a big wheel at JPM. Is he just blowing smoke so people buy the market, and JPM has someone to sell their stocks to? Or, does he really believe that the Central banks can indeed buy it all?
The tenant of the Central bank was chartered to say that the Fed would be the lender of last resort. Well, since 2009, they became the lender and the buyer of last resort.
I remember watching CNBC one day back in the 2009 time period. The Feds had all manner of "programs" running to resuscitate the markets which had crashed. Marc Faber of the Gloom,boom and Doom report came on for an interview and he said something very profound. After talking about what the Feds were doing, he stated that "they're going to buy it all, they'll own everything."
It seemed preposterous. Yet even way back then, we knew he was right. The economy never recovered from the 08/09 crash, it was simply papered over. And since we never recovered, now that we're in another crash situation, they've got to escalate their lending and buying scheme to levels unheard of.
So, here we are. Every fiber in your body says that this market is destined to fall to levels unthinkable. Yet the Feds stand willing and apparently able to not let that happen. Can they pull it off?
Let's say they can. Somehow they simply print so much money that the equity markets, the debt markets, simply don't implode. How can they scale out of that? They can't. They haven't been able to scale out of the programs they already had in place, let alone the trillions more they've pumped in the last few months.
Or consider that maybe JPM's Quant is simply wrong. Maybe this is simply the mother of bear market bounces,and like many of the past will evaporate? Nobody regretted not buying the Nikkei Average after the initial 30% decline in 1990 because the Japanese market continued the downtrend for much longer - admittedly with intermediate powerful bear market rallies. It finally bottomed out in 2008.
Similarly, from the March 2000 top the NASDAQ 100 dropped 40% to an intermediate low in May 2000 (two months after the top). From this intermediate low, a 3-month 41% rally followed, which led to renewed, severe, stock weakness and brought the NASDAQ 100 Index down to the ultimate low at 795 in October 2002 (down 83% from the March 2000 high). I guess that nobody really missed anything for not buying the NASDAQ 100 after the first initial decline.
I don't have the answer. But to be totally honest with you all, I have no choice but to entertain the idea that they've learned how to manipulate the markets to such an extent, and the ability to print such enormous sums, that it is possible that instead of a fade to much lower levels, we do climb back to the highs.
I'm not on board with it. I just suggest that it is possible. Considering it was Fed programs, low cost easy money, and stock buybacks, that took the markets from DOW 6,000 to DOW 30,000 in 11 years; and despite the lowest growth rates ever during that run, maybe they can pull it off.
If they do, we'll have something else to ponder. As Mr. Faber said so many years ago, "They'll own everything!" At that point, what is America like? I shudder to know.