Readers know I’m not a short term trader, and with my favorite crystal ball temporarily sidelined, not in the mood to play market timer either. But the stock market is getting out of hand. I should say more out of hand … it came to a fork in the road last spring, took the wrong path, and hasn’t looked back since.
Context is key. I haven’t touched my income portfolio. It’s about 75% stocks. My long term savings portfolio however is much more discretionary. And in this latter area, I’ve slashed stocks to 10%. The rest is elementary commodities (gold, silver, platinum, copper), cash and Treasuries.
The value just isn’t there. Stocks are largely dominated by supercap corps with low or no dividend yield, even at the global level. So I dumped most of my favorite stock fund, VT, the best single proxy for “the stock market” as a whole, as it nosed over $100. That can only mean one of two things. Either a rare stroke of short term luck or it’s on a fast track to $120.
It’s a page out of “don’t fight the Fed”. Although I may be taking liberties in assuming the Fed is serious about fighting inflation. As it turns out, for all the attention the stock market gets, each and every one of those metals was “up” more than stocks today. Reflecting of course that this glorious bull market in stocks is mostly just an artifact of a bear market in dollars. Otherwise known as inflation.
Will the Fed lean against it? It should, but I’m not holding my breath. The Fed is singularly focused on the exhaust fumes of the last surge of inflation, lately showing up in consumer prices and wages. While it’s intently parsing the exhaust fumes, another surge is headed for the fuel injectors. Without getting into who’s stomping on the accelerator (possibly some combination of fiscal deficits and liquidity left over from a couple years ago), contrary to popular imagery, the Fed is not stomping on the brakes.
Either the dollar stops dropping in real time markets or it will reaccelerate its fall against the much slower to reprice consumer goods and services. At which point the Fed will either be forced to pull out the big guns and redouble its efforts or wave the white flag and trash the tattered remains of its credibility. Neither of which would be good for the economy. The financial car is still speeding ahead at 100 mph, blissfully unaware of the brick wall dead ahead.
Hi Bill! It’s been a while.
“Without getting into who’s stomping on the accelerator (possibly some combination of fiscal deficits and liquidity left over from a couple years ago), contrary to popular imagery, the Fed is not stomping on the brakes.”
A great post over at ZeroHedge today: https://www.zerohedge.com/markets/something-very-strange-has-happened-albert-edwards-stunned-maddest-macro-chart-i-have-seen
It’s a short article tracking your “liquidity left over from a couple years ago” idea. Maybe the “missing link” (or one of them) for bypassing (or delaying) a recession. Keep up the good work, and you aren’t going to lose taking profits.
Hey Chris good to see your comments. Yeah I saw the ZH article. Rate increases just aren’t having the effect they used to. It used to be that the Fed put a floor under interest rates by restricting the availability of cash. Not any more. It now pays interest to support its rate target. As Edwards points out, corporations (especially the cash rich supercaps) have positioned on the receiving end of this largesse. This is a new way of creating money … I speculated about this possibility years ago on iTulip when the payment of interest in reserves was first announced. But this is the first time rates have been high enough for it to really make a difference.
Hussman gives an excellent account of the banking system plumbing:
https://www.hussmanfunds.com/comment/mc230519/
The amazing thing is even the Fed itself seems mystified as to why its hikes aren’t getting more traction.
So far QT hasn’t been enough to offset it, especially compared to the explosion of QE that came before. At less than $100B a month it’s going to take a while to drain that multi-trillion-dollar flood. With these offsetting cross currents, nobody really knows when the tortoise catches up to the hare. Maybe tomorrow, maybe next year…
I don’t have anything meaningful to add but back when the Fed started paying interest on excess reserves, I remember looking at the FRED plots of excess reserves. I thought it ironic that the peculiar abbreviation used by FRED for excess reserves (EXCSRESNW) looked to me at first glance to be “excrescence.” How fitting, I thought, because that’s exactly how I would grade the Fed’s shepherding of the currency and economy.
Thanks, Milton … always good to hear from you. And of course Fed folly is one of our richest sources of material…
fwiw I’m at 21% commodities and related stocks, especially energy, especially off shore. that, and some agriculture’ – dba, cf, ntr, mos and weat.
17.5% gold and silver, gold as phys, silver mostly miners. that’s pretty much it for equities.
the big caps are way overvalued and i gather it’s mostly retail buying them these days.
when you got out of vt, did you notice how much of vt is just the magnificent 7? i don’t know about vt, but they are a huge part of spy and a huger part of qqq.
but the passive flows have to reverse for them to really go down and it’s hard to see what will trigger that
Besides stocks ~10% that leaves it about 40% in the metals and 50% in Treasuries, not including an income portfolio of about 75% equities.
Being as VT represents the entire world stock market, it’s not as bad as the S&P as far as supercap domination goes. Still, the US is about 60% of total world market cap, despite having a much smaller proportion of global GDP and an even smaller proportion of world population. You can see VT’s holdings here. The top ten are all US companies, and the top seven the usual suspects:
https://advisors.vanguard.com/investments/products/vt/vanguard-total-world-stock-etf
It’s not that the US happens to just have exceptional companies … they also happen to be exceptionally high priced in relation to the size of their businesses as well, about double that of the rest of the world.
What makes them so expensive from the point of view of the stockholder also means from the point of view of the company they have an exceptionally low cost of capital. Investors have been hooked into a cap gains story and they don’t demand dividends to the extent they would elsewhere. Investors actually continue to subsidize companies long after they are mature and might otherwise be expected to share profits with their shareholders. A post on that issue is in the works.
It’s certainly good if you happen to be a corporate insider, but it’s not good for the economy or the average American. If it were you wouldn’t be seeing social unrest and political rancor on the rise, the recent surge in labor disputes, or the increase in socialist sentiment among the younger generations. Capitalism is ailing badly.
Years of ultralow interest rates and other devices to kite stock prices are at least in part to blame. They’re subsidies to corporations. Stock prices did manage to go down last year, and odds are they will again. If they keep going higher, progress on consumer inflation will reverse. The free lunch of indefinite asset price inflation without consumer price inflation has an expiration date, even if we don’t know what it is.
These things do eventually mean revert. At the end of the 1980s, Japan was about half the world’s market cap. Over thirty years later, the Nikkei is still below where it was then.
It wasn’t intended to produce immediate results, but so far my trade is a dud. Sure, stocks are down, but so are the metals and treasuries I traded them for. All about the currency. C’est la vie.
The catalyst? Appears to be a leak that the BOJ is considering a “tweak” to “yield curve control” (its repression of JGB yields out the yield curve). The prospect it could lift the (absurd) 0.50% cap on the Japanese ten year is triggering a shock wave in the currency markets. Mr & Mrs Watanabe have a ton of yen in overseas assets that might be brought home if rates get a little more attractive.
This trade is starting to look better. Stocks have sold off nearly 5%. The only fly in the ointment is that the gold and Treasuries I traded them for have merely sold off less. Cash USD has been the clear winner, along with short dated UST maturing in under a year.