A bombshell of a report was dropped last week, and no I'm not alluding to the "memo" released by the House. The report I'm referring to is what's known as an "ending balance report" showing precisely what one's current holdings are valued at week-end. And like the former - it had a lot of people seeing red, both figuratively and literally, in more ways than one.
Now the big question is this (as I heard echoed across the "whistling" media): "Is that it?" Hint: I don't think so. As a matter of fact, I believe the show has only just begun. Maybe for both, but I digress.
The reasoning for it is manifold. Yet, what may be the most telling is the sell-off coincided with near precision the "curtain call" for the now former Chair, Janet Yellen. I regard both the timing, as well as the size and breath of the turmoil to be a very significant tell for the fate and future of the "market."
To make the point let me use the following:
The known (or reasonably assumed) stance that the Federal Reserve would act favorably if not outrightly rescue "markets" is no longer a known quantity - it's now open to interpretation. And that "interpretation" will only be resolved in quality and quantity terms via two things.
First: What the Fed does - doesn't do - or continues to do, during any market rout. i.e., Do we get Fed jawboning in droves and more? Or, do they openly state a halting, pausing, ________(fill in the blank) of already voted or known quantities? i.e., balance sheet normalization, rate hikes, et cetera.
Second: What they do - or won't do, during an all-out market panic. i.e., Implement a QE4 measure, immediately, or some other brazen policy move? Or, heaven forbid, sit on their hands?
These were knowns or at least assumed knowns, quantities under the tutelage of the Bernanke/Yellen Fed Today? It's an entirely unknown variable.
And that changes everything.
As of late, the investing prowess known as "JBTFD" (just buy the f'n dip) has been held hostage to there being virtually no dips available for over a year.
Since the election in 2016, the worst and most cancerous investing lesson ever learned (e.g., JBTFD) went from: Waiting, then - buy any and all dips. To: Wait only for the "markets" to open, then - buy anything and everything with a ticker symbol. And it has worked flawlessly - till now.
Yet, this is where that once "winning" strategy, along with the lessons and habits it's rewarded so handsomely may become a curse - Adaptability, along with a fundamental understanding for the complexity of how and why markets move (or at the least should) have either, a) never been taught or, b) been completely forgotten or unlearned aspects of finance.
This is an important point, for it's not as if there weren't some very fundamental tells of what was coming (at least for the near future) being telegraphed within not only the bond as well as currency markets, but also in commodities such as oil and others.
As these stresses (i.e., falling dollar, rising interest rates above key levels, China market rumblings, oil rising, et cetera) began rearing the ominous warning signs, the "market" not only didn't react or take any pause - it began to further accelerate in true parabolic fashion.
This was the moment, in my opinion, which showed in spades just how far the codified investing prowess based purely on mimicking the machine-learned behavior of the past decade had been internalized since QE and all its iterations. Most outlets appeared either clueless, or worse, completely ambivalent to having any regard.
JBTFD investing aka hitting the "easy button" was all that mattered, regardless of all other market considerations. This is mania type behavior and it comes at a price. Hint: See Bitcoin™ for clues.
Personally, I've been left speechless (and coming from me that's saying something) over the past few months as the "markets" went from going-up to going-straight-up.
I'm not the only one, but you wouldn't know of it watching, reading, or listening to most mainstream business/financial outlets. That is, unless someone volunteered to be the guest "piñata" of the day.
And that in and of itself is going to have reverberations going forward because far too many working as well as investing in the "markets" today have little to no clue, let alone any real hands-on experience allocating or preserving mental as well as physical capital during two-way markets. Especially swift, quickly reversing, multiple percentage moving markets.
This is where JBTFD investing prowess morphs into "Catching falling knives" results; i.e., in the red and bloody. Let me explain using the following:
If you graduated from school within the last 10 years and either work on Wall Street or your work is closely intertwined (and in reality it's all intertwined) all you know is one side; i.e., you have never, ever witnessed market turmoil that demands both action in the moment as well as a cognitive understanding that's executable in that moment of, and for, risk/reward. Let alone tested strategies and tactics made under such direst.
If you think "diversification" or a "diversified portfolio" is all one needs and is going to save the day during market turmoil? May I suggest you think again. Or better yet, ask someone who's either lived through the financial crisis, or even better - someone who traded during it. (On a side note, I did both for those wondering.)
This isn't to brow-beat, or berate a point. What I'm trying to do is point out a very important fact, for the implications are what's important, and it's for the following:
Not only is Wall Street currently populated with more "never seen a down market" types than probably any time in recorded history (Think most, if not all, so-called automated, goal-based investment platforms, or brokers). There's another variable that's even more chilling and it is this: There're barely any people trading at all; i.e., it's all machine trading based on pure algorithmic formulas. And the power (i.e., QT: quantitative tightening) to fuel those machines is being reduced. And that's not all.
These "algos" per se have been constructed and tested in much the same way; i.e., by recent college grad, math whizzes. And here's another important factor: All during a market that only knows central bank largess.
Don't gloss over that point. Truly contemplate the implications, it's worth the time, if not the possible savings of one's future bank balances.
In days of yore (pre financial-crisis) market-makers (e.g., humans) did precisely that - make markets. During fast and swift down markets people (e.g., traders and the houses and/or banks that backed them) would step directly into the path of a rout and make markets based on their own tried-and-tested (along with big ole helpings of chutzpah) risk parameters and more. Even during what at the time seemed liked collapsing markets. (Think live trading and market-making in explosive volatility where jumps from the teens to 50 and 60 handles and back again were considered "fun" and "exhilarating")
But that was then and this is now. And nearly all of those people have either left or been jettisoned in lieu of computers. And that's going to be a very big problem going forward in my humble estimation. Why?
What do the machines seem to do when a market rout is on? Hint: "Pull plugs" or my personal favorite, suddenly "break." Then, they suddenly, magically seem to reappear, or get "fixed," when the market stops going down, relieving any pent-up selling pressure. Then, again, as if by magic, the BTFD cabal suddenly reappears where, "everything is just ducky" once again; i.e., nothing to see here folks, move along, your balances will be just fine come closing time.
This appeared as a proven, reasonably assumed conclusion, time and time again - until Friday. This has now left the "markets" in a quandary of, "Now what happens?" And that is where the big question now resides; i.e., can you just hit "the button" without forethought any longer?
My opinion: Not any more, and here's why…
Precisely what the Fed or any central bank for that matter will now do, or more importantly, may not do is now an unknown.
With Ms. Yellen bowing out, so too goes with her the known quantity these markets have been built on; e.g., "The Bernanke/Yellen Put"
Now the "market" (and the Wall Street cabal that runs it) needs to find out if there's going to be a Jerome Powell version, similar in kind.
And there's only one way to find out. And that dear reader, changes everything…