There is some fair attention given to the heavy global rounds of quantitative easing ("QE") and the chance that it can spark markets (NYSEARCA:SPY) to continued new highs. We think this is a very risky hot potato because underlying it is the same weak, slowing fundamentals. We want to show why we think the bull move will not last and, just the opposite, the amount of QE is a major sign of global risk.
The market broke out but we don't think it is sustainable.
We've shown that the market likely broke out as a record amount of investors post-Brexit were caught short the following weeks for the US jobs report and options expiration.
Here's the record options volume in June that we think was heavily tilted to the short side.
This was the scene thanks to Brexit in June. Everybody went short (around June 24th). Jobs came out August 8th and caused people to cover and then again the following week into options expiration.
The combination of huge Central Bank ("CB") liquidity and a major short position plus the jobs helped propel markets higher the three weeks following Brexit. We agree.
That said, we think that was then. It was a three pronged liquidity event that has now passed.
The market can go back to whatever it was doing.
Here's where we think the market will go.
The above chart looks like the market but it's not. It's Federal Reserve balances. Exactly when the US QE stopped going up the US markets stopped going up. The Fed had almost exactly ZERO moves the last two weeks in their reserves. That said the reserve direction is down.
We think the US market is ultimately at the mercy of this liquidity level.
But Elazar now that the Fed has stopped other CBs have ramped up money production? Shouldn't that drive the markets??
That's a fair point. We respect it.
Japan and the ECB are pedal-to-the-metal full blast money printing trying to get their -.1% inflation to +.1% inflation (as President Draghi talked about today.). The ECB said they are so far on the mid-point of their plan to drive up inflation and growth.
Here's the ECB liquidity spree.
We ask you an unbiased question? Have they already been at full blast? Yes or no? They have right? It's not really just since Brexit they've been full blast. They were already at full blast.
No change here.
So what changed that makes you think NOW the ECB will get the US markets up?
If anything the easy picking market drivers were already eaten up by the ECB. They bought the low hanging fruit bonds they intended. Now they are struggling to find bonds to buy.
They were asked today at their ECB post decision press-conference by about three different people "do they need to change the rules" to find more bonds to buy.
Why do so many people ask the same question at one meeting? Because they are MAXED OUT. They can not find enough bonds to buy to meet their "80 Billion Euro per month mandate until late March '17."
Enough bonds that meet their criteria simply do not exist in the market place. To meet their mandate they have to change the rules, you know, make up new laws to continue pedal-to-the-metal economics.
Can I say that again. They have to change the law to meet their pedal-to-the-metal economics.
Their response, "We have not considered that yet." "We gave it no attention."
They gave no attention to the fact that their laws don't allow them to buy enough bonds they set out to buy.
Please listen to the video link above and tell us we are just way off, we misunderstood that. Please someone. Tell me it's just a dream. I am not really hearing what I'm hearing. Please wake me up. (Elazar way too much dramatics, get a hold of yourself. Sorry markets down one day in the last year we got carried away.)
Does that make any human sense? Change the law to meet a mandate because they planned for too many purchases.
If you run a hedge fund and a trader who ran out of capital asked you to buy more but you couldn't would you:
A) Do it anyway despite breaking the law
B) Call the legal team and then do it anyway
C) Fire that trader
We have an epiphany, like a trader margin call, maybe their original mandate is too aggressive if it can't be filled by relevant bonds in the marketplace.
Maybe this well designed, university educated, scholarly panel is being way too aggressive. Is it possible?
So now we have several reasons why we don't think CB QE drives stocks higher.
1) Because it's utterly insane. It is showing how desperate they are. Desperation, for us, is not something you want to buy, it's something you want to what??? Sell, exactly. Our desperation signal just went off and it's saying sell.
The only way they can hold markets up is to buy bonds that they can't buy. (Please read that again and please again tell me I am just way off. Please!)
2) If the huge masses of ECB trajectory in the chart above didn't already get the market up we don't think it can in the future.
Again, we think the breakout was a one time stars-aligned short squeeze. It came, it went, next, we're back to the market getting back to normal.
3) The master artist of this QE-thing, the US, is talking about tightening which would mean pulling back on that yellow line Fed balances.
The US is talking about raising rates. So while buyers are being crowded out by CBs in Europe and can't buy anything at home, we think they might wait to buy anything overseas in the US. Investors might be on hold to see what the Fed is actually going to do.
What goes with a rate hike is the dropping of Fed QE. We think the declines in the Fed balance trajectory (now that they are talking tightening again) has the risk to offset the ECB and Japan CB trajectory higher. That is a major market risk.
4) We think Eurozone investors would be on hold after listening to the ECB today. Here's some of what they said, please let us know what feelings it conjures up in you.
Here's what we heard President Draghi say at the ECB press conference.
"ECB calls for a public backstop for non-performing loans to avoid fire sales." (Bail out like 2008 in the US)
"Possible execution difficulties" to buy all the bonds they need to meet their mandate but that they "paid no attention."
"There is downside risk to the .5% 3 year Brexit impact. That (those estimates) needs to be taken with a grain of caution ("Salt"). He repeated grain of caution a couple of times. He didn't want to say outright that his experts that provide him all his work should be taken with a grain of salt. (Please again I insist listen to the replay of the ECB conference today and please tell me I'm way off.)
We did not walk away confident after that meeting today.
We think that the ECB amounts are more than the economy can stand and that is a sign of desperation. Desperation is a negative sign, not a positive sign. It shows us that even if the market goes up, underlying there is not much there except CB liquidity, which doesn't give us the sleep-at-night confidence that it holds like it intends.
Not only does the ECB sound desperate, Fed governors are sounding desperate
We've been following this some time but more and more we hear Fed governors saying the quantitative easing can't help without fiscal stimulus. We think it's relatively new.
Fed governors are saying that because of demographics and productivity the US needs some fiscal policies that drives more births.
We categorize that in the Now You Tell Us Rating?
Now after eight years of QE1,2,3 we need policies that drive more births and THEN the economy will be back on track. C'mon.
Bloomberg reported today that on July 12th James Bullard said this (pay attention because this is fun), "Stimulus is something you're doing to try to smooth things out over a couple of quarters, and that isn't how we need to be thinking about the U.S. economy, We badly need a growth agenda."
People please go with me here. He's one of the major Fed officials. He's now a dove but he goes back and forth.
Did he just say stimulus needs to be over how long? A couple of quarters??? Did I hear that right? How many couple of quarters are we into with this stimulus episode.
That is code word for "it's not working we now need fiscal policy to save us." Our 8 years of "a couple of quarters of stimulus" is not working so we need to blame not giving birth to enough children, productivity and the congress for not drumming up some fiscal policy.
Again, that is code word for "uh oh our QE isn't cutting it."
The bail out needs a bail out.
Ah, that was fun.
Where could we be wrong?
If growth does in fact pick up the market could go up. We admit. But based on (global now) clear and coded calls of desperation, we are less optimistic.
We leave you with this.
With out pedal-to-the-metal economics, where would this economy and stock market be?
Look what has been needed to hold it up.
Does that make you feel safe and sleep-easy at night? (I hope I'm allowed to say this) Even in those "safe" dividend plays, do you feel safe?
This is not a safe setup.
We wanted to think about the global CB QE spree going on today. We had a flash that maybe this bull market is real, maybe the money can keep the market up.
Then we listened to calls of desperation from the EU and US.
Then we thought about that tightening in the US could offset easing in the EU and Japan.
We remain bearish.
Please please (two pleases this time) be safe.
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(Aggressive Ignores our Medium Term Fundamental Call and just focuses on the week)
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Disclosure: I am/we are short UPRO.
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