"our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments"
Denial is now the universal religion
"A dramatic week of central-bank meetings and economic data has changed the game for global rate-hike bets"
A great interview this week with "perma-bear" Jeremy Grantham. He calmly and eloquently sums up this era's risks. The adjective "perma-bear" is intentionally used to ensure everyone knows ahead of time that his opinions should be ignored. Far better to trust financial industry psychopaths than someone who would tell us this fairy tale has no happy ending:
"About 25 years ago, we felt in order to talk about bubbles, we should define them statistically...A two-sigma event is the kind that should occur every 44 years in a perfectly random world...three-sigma, is the kind that you would expect every 100 years"
The S&P 500 trendline is about 2,500; two-sigma is about 3,500; and three-sigma is 4,500, 4,600. We got to 4,800 in December 2021"
"History has been pretty straightforward. Whatever you do, don't have gloriously overpriced housing markets at the same time as you have a stock market bubble. Japan tried it...the stock market isn't back to '89, but the land market isn't back to '89, either"
By the time the pandemic hit, the market was already above Y2K bubble valuation when measured by market cap to GDP. Fed tightening has ended every market bubble in the past 100 years. Now we are to believe that this 3 sigma super bubble will be the exception when the Fed is adamant they are going to stop inflation.
Sure.
The importance of market cap to GDP as a valuation measurement is that it's a far more objective metric than the standard price/earnings ratio. Today's earnings per share have been massively inflated by record profit margins and record stock buybacks. In other words factors that are leveraged to the cycle itself. When the cycle ends, these inflated factors will revert to trend and then earnings will collapse. Nevertheless, almost all of today's pundits use P/E ratios to justify today's record valuations. History will not be kind to an industry using artificially inflated metrics to justify buying a three sigma asset bubble. Soon, only the lawyers will be making money on the long side.
On the monetary policy side, there are many lethal mistakes today's policy-makers are making at this juncture, and they've been aided and abetted by mainstream inflation hysteria. The first mistake is measuring inflation on a year over year % basis coming out of a lockdown pandemic. Not one of today's inflationary factors will survive this market crash. The second mistake is ignoring credit risk late in the cycle. Ironically, China is the only country NOT tightening monetary policy because their stock market and real estate markets are already in meltdown. They will be at the epicenter of this global meltdown. The third factor central banks are ignoring is the amount of tightening that has already taken place in markets. And most importantly of course they are ignoring the three sigma asset bubble they inflated and the fact that breadth has been imploding for a year already.
Put it all together and they're driving off a cliff by looking in the rear view mirror. And there is NO ONE to stop them. Inflation hysteria has gone global and "Shock and awe" is the order of the day:
"A dramatic week of central-bank meetings and economic data has changed the game for global rate-hike bets"
"Not only are money-market traders boosting wagers on the number of increases by major central banks, but also the size of each potential move, reflecting the prospect that policy makers will front-load tightening cycles to combat inflation"
The last time of course we saw this movie was September 2008 when the two year was similarly priced ahead of spot rates AND market breadth had collapsed (lower pane).
For the past three weeks since the January low we've been seeing a massive short-covering rally ahead of central bank meetings, the jobs report, and now the monthly CPI report which came in today.
Now, almost all asset markets have the same corrective wave form.
Small caps:
Consumer Discretionary
Semiconductors
Cyclicals
Meanwhile, despite all of this inflation concern and central bank promise of shock and awe, there is no hedging taking place compared to 2018 and 2020.
Ironically, this is the first time a Fed put doesn't exist, and an option put doesn't exist either.
In summary, I predict there won't be even ONE rate hike in this cycle. And the ten year yield is heading to...
ZERO %. You know, like Japan.