A year ago, the financial markets were infected with the coronavirus. Black Mondays, dead cat bounces, falling knives, and billions of dollars in liquidation dominated the business headlines. Twelve months later, equities are at record highs, commodities have been supercharged into a supercycle, cryptocurrency’s journey to the moon is back on, and armchair investors are beating the hedge funds. But why is there this overwrought feeling that the colosseum is about to implode? Perhaps the tagline from Christopher Nolan’s epic 2020 picture Tenet explains it best: “Don’t try to understand it. Feel it.”
Treasury Island Takes Wall Street
Did a frenetic February pave the way for a marvelous March? Or are holes in the sinking ship taking on water?
It has been an unsettling start to 2021, with the equities arena soaring to levels never seen before, only to record epic single-session collapses. This was on display during the Feb. 22 trading week as the benchmark bond yields enjoyed double-digit gains, resulting in a beatdown of stocks. The leading indexes, Elon Musk's Tesla Motors, and commodities suffered enormous losses to close out February's final trading week. The only smart play, it seemed, was buying shares of GameStop after the memeified stock posted a weekly spike of 150%.
The euphoria returned on March's first trading session, offsetting the panic that likely infiltrated retail traders – both seasoned and novice – during the selloff. Indeed, the year-long rally returned, with nearly everything on the rise again, including Treasurys. The Dow Jones Industrial Average added more than 2%, the S&P 500 roared 2.5%, and the Nasdaq Composite Index popped 3%.
So, why is there an eerie feeling that a significant correction is on the horizon, despite the Federal Reserve promising to continue pleasuring the market with quantitative pleasing? The central bank’s money-printing efforts, historically low interest rates, and never-ending bailouts are here to stay, according to Fed Chair Jerome Powell – and without the consequences of inflation!
On the surface, everything is damn the torpedoes and full speed ahead. Once you dig a bit deeper, the data suggest something ominous may be coming. Oscar Wilde’s The Picture of Dorian Gray is perhaps the most appropriate comparison to today’s ultra-bull run.
During the Feb. 25 session, short sales outpaced modest long buys by 13 to 1, according to Goldman Sachs. Financial Industry Regulatory Authority (FINRA) data found that the volume of borrowed money in margin accounts surged 38% in 2020 to just under $778 billion. The Buffett Indicator – the ratio of total U.S. stock market valuation compared to the gross domestic product – is at an all-time high of 195%.
Does this mean it is time to hit the sell button and count your profits? Not if the Fed has a say.
Never Fight the Fed
Eric Peters, the CIO of One River Asset Management, recently penned a piece that painted both a bullish and a grim portrait of the state of the U.S. economy and stock market. He wrote:
"But after decades of monetary manipulations, it is no longer Fed chairmen who markets should fear – they will never again knowingly cause a collapse. The next great catalyst, when it comes, will be against the backdrop of an accommodative Fed. It’ll be seemingly trivial, stupid."
For years, the Fed had been the worst-kept secret on the New York Stock Exchange. The business news networks, financial analysts, and even politicians refused to accept that the Eccles Building occupied both Wall Street and Main Street. It is as if the Mises Institute alumni only understood the godly and unchecked power of the chief Swamp monster. Now everyone accepts that the institution plays a critical and perhaps leading role in this production of Who’s Afraid of Virginia Woolf, whereby chaos, mendacity, and self-delusion reign supreme in pursuing higher asset prices and yields.
Unlimited quantitative easing, near-zero interest rates, and asset-buying occurring in the United States and around the world can make it challenging for the market to experience a full-blown correction. The bears might need to wait longer for the inevitable popping of the bubblemania in each asset category, from vintage art to cryptocurrencies to real estate. Put simply, as the old market rule dictates, never fight the Fed.
The New Rules to Investing
Are the days of technical analysis, balance sheet investing, and long-term outlooks outdated? You cannot fault the new kids on the 11 Wall Street block for making these bedrocks of successful investing passe. Young millennials and Generation Zers are byproducts of the lost decade (decades?), despite being the intended recipients of the greatest wealth transfer in human history. The older generations own the houses, maintain the hefty 401(k) accounts, and enjoy the fruits of yesterday’s prosperity that Alan Greenspan and Ben Bernanke bequeathed. As the adrenaline-fueled thumbs buy and sell securities on a whim on their smartphones, outsiders looking in will wonder why they should buy and hold when they can participate in a meme-driven frenzy and potentially strike it rich in a fortnight. Conventional investors like Buffett or Charlie Munger might not like it, but this is what happens when the Fed floods the economy with cheap money.
The stock market is not intended to be a casino, but it has turned into one. A heist or a blackout will eventually turn the lights off, leaving millions of traders in the dark. When it does, don’t try to understand it. Feel it.
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Read more from Andrew Moran.
