Wall Street Continues To Make The Mess Even Larger. And Many Are Paying The Price.
This wasn't the original post I had said I was going to put up but I'll get that one up within a week.
I decided to put up an interim post on the massive speculation we've been seeing over the last few weeks. Forget about sentiment surveys. I'm talking about actions in the markets. Any time we see large capitalized stocks going up 5-10% in a day, we are seeing massive speculation or enthusiasm for risk taking courtesy of our unregulated friends in capital markets. Remember, the long term annual return for the Dow is mid single digits. Not 5% in four hours.
I talked to a trader this weekend who told me that he's about to hang it up after twenty years because the market manipulation is so severe. This is from someone whose portfolio is up over 1,000% this cycle. We effectively have unregulated pools of capital similar to the last 1920s with a massive ability to distort markets. All markets. Global markets. I had a few prior posts on 'stock pools' and you can find them by searching the site in the search box on the right side of the blog.
Right now the U.S. equity markets are incredibly overbought. So, this could be close to an intermediate term top as each time we've been this overbought over the last year, we've been close to a sell off of some sorts. If I would attempt a shorter term prediction, which are very difficult, I'd be inclined to lean towards a top between here and 1460 in the S&P. One reason for this position is some commodity stocks are likely near an exhaustion point after a re-ignition of their parabolic trajectories over the last month. But, yet, again, as in the last attempted rally, the S&P hasn't made any progress. In other words, the only trades working are based on the emerging market inflation trade. (This point will dovetail nicely into the next post.)
One of the most astonishing performers in the last few weeks has been a stock I wrote of as being my favorite stock this cycle, U.S. Steel. U.S. Steel is now up 1,500% this cycle. Mind you, from a buy and hold standpoint, the volatility has gotten pretty extreme and anyone who has held through its gyrations has a stronger gut than I do. This has become a trading stock with such high volatility. Without looking, I believe it's up about 40% in the last month. I never would have imagined a move anything like 1,500% was possible. Never. Not even once in a hundred year or even thousand year event. The speculation we are seeing in global asset markets is simply massive. In the last few weeks companies in a few of these commodity sectors were trading up 5%-10% in a single day. U.S. Steel's return over the last eight years has been about forty percent annually. That is nearly incomprehensible for a legacy business. This bubble is massively larger than 1929. Using a conservative approach, U.S. Steel is now discounting between thirty and fifty years of earnings and cash flow. Think about that for a second. What does that mean? That means whenever we see the finality of price exhaustion, its stock could very well not make another new high for another thirty or forty years. That sounds like an amazing impossibility doesn't it? But, is it really any more amazing than its rise? If that isn't a worrisome point for future asset prices, then I don't know what is.
So, what has re-ignited parts of the asset bubble? Well two things are most likely. (You'll notice neither has anything to do with economic demand.) One is that the Fed actions have, in part, helped to provide a temporarily reprieve of the forced asset selling that was taking place. And, second, is the actual use of the liquidity that the Federal Reserve has provided. There is little demand for economic capital so how are these financial institutions going to use the Fed's liquidity or any liquidity to improve their capital positions? By doing what they have been doing. That is by using the same schemes used to create this massive asset bubble to make even bigger asset bubbles. Because now these firms make more money trading against you (their client) and providing services to hedge funds that trade against you in the asset markets than they make serving you as a client. In other words, the only reason they want your money now is to collect management fees and to use it as a basis to bludgeon you with higher commodity prices.
Given financial institutions are no longer able to re-ignite consumer credit, commercial or residential real estate, private equity, securitization, mergers & acquisitions, IPOs, significant new debt origination, commercial paper or any of the other bubbles they've created, they are using that liquidity on what works. That being emerging market investments and ramming the same old stocks and commodities to even greater bubbles. This is an ominous sign and not a sign of recovery. I wrote a few years ago that Wall Street wouldn't quit ramming commodities until they killed the economy. Just like they rammed every other asset until they killed it. Or demand for it. We most assuredly are seeing significant demand destruction for commodities. Two prime examples are gasoline consumption in the U.S. and emerging market food riots given many are now unable to afford foodstuffs. There is no shortage of food. That is Wall Street speak. There may be food hoarding because of price rises and affordability issues but what does that have to do with shortages? There is money hoarding too but that doesn't mean we are running out of money. The only shortage is the growing shortage of money needed to buy food. And of regulation to keep Wall Street from extorting impoverished people. But, why is this any different than predatory lending we've seen this cycle? When a monopoly gains an ability to do so, it can be expected to do anything. Didn't we already say this? Anyhow, this is all symptomatic of what happens when Wall Street believes it can drive the economy instead of the natural homeostasis of supporting it. Wall Street will return to its constructive and necessary role of supporting the economy whether it wants to or not. It is the will of the gods. And, being omniscient, the gods are never wrong.
The Fed should have the ability to restrict use of its liquidity to domestic economic use of capital in situations such as this. But, they don't. Of course, the Fed didn't need to really worry about that historically because banks served a traditional role of supporting the economy. No longer. So, we get more rampant banker speculation at our expense. The end result is that society gets to pay even higher commodity prices courtesy of financial institutions. A government bailout for Wall Street again has the unintended consequences of creating economic pain for its citizens. And, for many citizens around the globe.
This all means the mess continues to grow as opposed to what the intended consequences of intervention were. That being mitigation of outcomes. Party on! It's a Brave New World.
I decided to put up an interim post on the massive speculation we've been seeing over the last few weeks. Forget about sentiment surveys. I'm talking about actions in the markets. Any time we see large capitalized stocks going up 5-10% in a day, we are seeing massive speculation or enthusiasm for risk taking courtesy of our unregulated friends in capital markets. Remember, the long term annual return for the Dow is mid single digits. Not 5% in four hours.
I talked to a trader this weekend who told me that he's about to hang it up after twenty years because the market manipulation is so severe. This is from someone whose portfolio is up over 1,000% this cycle. We effectively have unregulated pools of capital similar to the last 1920s with a massive ability to distort markets. All markets. Global markets. I had a few prior posts on 'stock pools' and you can find them by searching the site in the search box on the right side of the blog.
Right now the U.S. equity markets are incredibly overbought. So, this could be close to an intermediate term top as each time we've been this overbought over the last year, we've been close to a sell off of some sorts. If I would attempt a shorter term prediction, which are very difficult, I'd be inclined to lean towards a top between here and 1460 in the S&P. One reason for this position is some commodity stocks are likely near an exhaustion point after a re-ignition of their parabolic trajectories over the last month. But, yet, again, as in the last attempted rally, the S&P hasn't made any progress. In other words, the only trades working are based on the emerging market inflation trade. (This point will dovetail nicely into the next post.)
One of the most astonishing performers in the last few weeks has been a stock I wrote of as being my favorite stock this cycle, U.S. Steel. U.S. Steel is now up 1,500% this cycle. Mind you, from a buy and hold standpoint, the volatility has gotten pretty extreme and anyone who has held through its gyrations has a stronger gut than I do. This has become a trading stock with such high volatility. Without looking, I believe it's up about 40% in the last month. I never would have imagined a move anything like 1,500% was possible. Never. Not even once in a hundred year or even thousand year event. The speculation we are seeing in global asset markets is simply massive. In the last few weeks companies in a few of these commodity sectors were trading up 5%-10% in a single day. U.S. Steel's return over the last eight years has been about forty percent annually. That is nearly incomprehensible for a legacy business. This bubble is massively larger than 1929. Using a conservative approach, U.S. Steel is now discounting between thirty and fifty years of earnings and cash flow. Think about that for a second. What does that mean? That means whenever we see the finality of price exhaustion, its stock could very well not make another new high for another thirty or forty years. That sounds like an amazing impossibility doesn't it? But, is it really any more amazing than its rise? If that isn't a worrisome point for future asset prices, then I don't know what is.
So, what has re-ignited parts of the asset bubble? Well two things are most likely. (You'll notice neither has anything to do with economic demand.) One is that the Fed actions have, in part, helped to provide a temporarily reprieve of the forced asset selling that was taking place. And, second, is the actual use of the liquidity that the Federal Reserve has provided. There is little demand for economic capital so how are these financial institutions going to use the Fed's liquidity or any liquidity to improve their capital positions? By doing what they have been doing. That is by using the same schemes used to create this massive asset bubble to make even bigger asset bubbles. Because now these firms make more money trading against you (their client) and providing services to hedge funds that trade against you in the asset markets than they make serving you as a client. In other words, the only reason they want your money now is to collect management fees and to use it as a basis to bludgeon you with higher commodity prices.
Given financial institutions are no longer able to re-ignite consumer credit, commercial or residential real estate, private equity, securitization, mergers & acquisitions, IPOs, significant new debt origination, commercial paper or any of the other bubbles they've created, they are using that liquidity on what works. That being emerging market investments and ramming the same old stocks and commodities to even greater bubbles. This is an ominous sign and not a sign of recovery. I wrote a few years ago that Wall Street wouldn't quit ramming commodities until they killed the economy. Just like they rammed every other asset until they killed it. Or demand for it. We most assuredly are seeing significant demand destruction for commodities. Two prime examples are gasoline consumption in the U.S. and emerging market food riots given many are now unable to afford foodstuffs. There is no shortage of food. That is Wall Street speak. There may be food hoarding because of price rises and affordability issues but what does that have to do with shortages? There is money hoarding too but that doesn't mean we are running out of money. The only shortage is the growing shortage of money needed to buy food. And of regulation to keep Wall Street from extorting impoverished people. But, why is this any different than predatory lending we've seen this cycle? When a monopoly gains an ability to do so, it can be expected to do anything. Didn't we already say this? Anyhow, this is all symptomatic of what happens when Wall Street believes it can drive the economy instead of the natural homeostasis of supporting it. Wall Street will return to its constructive and necessary role of supporting the economy whether it wants to or not. It is the will of the gods. And, being omniscient, the gods are never wrong.
The Fed should have the ability to restrict use of its liquidity to domestic economic use of capital in situations such as this. But, they don't. Of course, the Fed didn't need to really worry about that historically because banks served a traditional role of supporting the economy. No longer. So, we get more rampant banker speculation at our expense. The end result is that society gets to pay even higher commodity prices courtesy of financial institutions. A government bailout for Wall Street again has the unintended consequences of creating economic pain for its citizens. And, for many citizens around the globe.
This all means the mess continues to grow as opposed to what the intended consequences of intervention were. That being mitigation of outcomes. Party on! It's a Brave New World.
<< Home