Tuesday, April 27, 2021

The Calm Before The 100 Year Storm

A confluence of risks are coalescing around this week's FOMC meeting, which may well answer the question as to whether or not the Fed still has control over the markets. Central banks have intentionally dampened volatility in order to give investors a false sense of security. I call it the Efficient Explosion Hypothesis. It never fails to encourage investors to take maximum risk at the worst possible time. Which leaves the fate of investors in the hands of known con men. Because why break with tradition now?








My opinion for the past several months has been that the Fed has lost control over the bond market. Up until the last FOMC meeting in March, yields had been rising inexorably, notwithstanding the Fed's bond buying program. Part of which was intentional as the Fed is intending to "reflate" the economy, hence bonds were building in an inflation premium. However, the downside effect of exploding yields is an exploding bond market. All of that changed at the last FOMC meeting (mid-March) when the Fed somehow assured markets it could keep yields under control while allowing the economy to "run hot". Subsequently yields have backed off even as the economic data has been coming in hotter by the day. Many theorize that this recent bond rally/yield decline has been due to short covering.

Speaking of which, the biggest risk of promising endless liquidity for the economy, is that it has emboldened speculators to onboard ludicrous amounts of leverage. That in turn has forced money managers to abandon all forms of risk management. 


"The median short interest in members of the S&P 500 sits at just 1.6% of market value, near a 17-year low"

“There’s just mass euphoria...No one wants to get their head ripped off by a short anymore.”


What we notice is that the most shorted stocks which tend to be Retail (Gamestop, AMC etc.) tend to spike ahead of FOMC meetings. In other words, Reddit gamblers are using Fed meetings as a backstop for their pump and dump schemes.







In addition, as we see above, central bank control is now a low volume illusion. They have pushed everyone to the same side of the boat, which ensures a bidless market on the other side of meltup. Unlike last year, central banks won't be able to bail out investors this time around. Those who buy into this illusion will be imploded.

Therefore, it's highly possible that the Fed's "control" over markets is reaching its terminus. No longer can they at the same time over-lubricate markets while ignoring the fact that certain sectors of the economy are over-heating, despite massive unemployment. In other words, there are key bottlenecks in the economy as one would expect in a late cycle expansion. 




Market volatility may well pick up as investors fear the Federal Reserve could fall “a little behind the curve” on inflation by having “such a dovish stance,” according to Fernandez. Still, she expects any spikes in inflation over the next few quarters, including in areas such as commodities, will be relatively short-lived"

“True longer-lasting inflation typically comes from wages”


Anybody worried about wages rising has been living under a rock for the past several decades. In other words, this is 2008 deja vu - commodity inflation from rampant speculation is feeding back into the economy. Yet again, the commodity/cyclical trade is a massively crowded consensus trade.

At the end of the cycle. 

Corporate sentiment has jumped to an all-time high so far this earnings season...This corroborates our preference for cyclicals/value over defensives” 







As I showed on Twitter, despite the fact that new NYSE highs peaked at the last FOMC meeting, the market cap weighted NYSE Composite index has continued to chug higher. It has been decade overbought since the election.






Yesterday, the Nasdaq finally joined the Dow and S&P at new all time highs. However, the number of stocks confirming this high has collapsed.





In summary, similar to Gamestop and BitCon the fate of stock market investors is now solely in the hands of con men. 





Why break with tradition now?