Happy Days Are Here Again

Markets continue to behave as if 2022 never happened, inflation is dead, growth is strong, the Fed is impotent, we’ve had a soft landing and caution can be thrown to the winds. Stock prices have resumed their uptrend and new highs are soon to be seen. After all, the Dow is only down 7.5% from its all-time high close, and the S&P only 15%, dragged down by the big tech stocks, which are recovering fast from irrational selling, thanks to cost reductions from layoffs. VIX, the volatility index, is at levels last seen in early January last year, close to the December 2021 all-time stock market highs (18.06 as I write). Perhaps that is not a coincidence.

To me, this looks like an opportunity. Far be it for me to rain on a parade, but this looks like a bull trap.

Unwarranted

From the minutes of  the Fed’s 12/13-14 meeting:

Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.

Per Bloomberg, financial conditions are now back in pre-QT, super low rate – i.e. bubble – territory.

Fin Cond Index

This isn’t going to make Jerome Powell happy, is it? Could 0.50 be back on the table? Just to get the markets’ attention…

What If?

The stock and bond markets are depending on the recession to “force” the Fed to “pivot” back to money printing and ZIRP. The economy is addicted to free money and is slowing rapidly now that it has been withdrawn. The bond market has already priced in disinflation and Fed easing, and the stock market has been buoyed accordingly, proceeding from short squeeze to short squeeze since June of 2022.

But what if Powell has decided that the QE policies that have yielded only $1 of GDP growth for every $10 of fresh debt are toxic and the addiction must be broken, no matter what the symptoms of withdrawal might be? That his legacy will be having returned the economy from dependence on continuous stimulus to sustainable growth? To say nothing of reducing the Fed-induced income inequality that is being exacerbated by inflation? That would certainly earn him a niche in the financial Hall of Fame, perhaps next to Paul Volcker.

Froth

While a little of the massive cash pile that resulted from the Fed’s monetization of Treasury debt has been whittled away, there’s more than enough left to continue to encourage the manic speculation that we’ve seen in recent years. A week ago yesterday, Thursday, January 5, Bed Bath and Beyond (NYSE: BBBY), a past favorite of meme stock traders, told investors that ”there is substantial doubt about the Company’s ability to continue as a going concern.”

The stock closed that day about 30% lower, at $1.69. The following day, Friday, it closed another 23% lower, at $1.30 – fair enough for a company that had just issued a bankruptcy warning. But starting on Monday, the meme stock traders started a bull run and took BBBY along for the ride. On Thursday – yesterday –  the stock touched 5.87, a 350% gain from last Fridays’s close. Today, it closed at 3.66, a 180% gain from its low close and a 52% gain from its pre-news close.

This is not investing. This is the kind of speculative frenzy that is generally called “froth.” As in “frothing at the mouth” or “rabid.” “Froth” is at tops, not bottoms.

Edit: Just noticed that Bitcoin is back over $20K. Despite the continuous drumbeat of frauds, hacks, rug-pulls, SEC lawsuits, defaults, bankruptcies etc. Another sign of speculative fever.

Edit: I guess it is everywhere. “Lotto Madness” is back. Two months after a record-breaking $2 billion jackpot, another winning ticket, sold in Maine, is worth an estimated $1.35 billion. Odds of a jackpot-winning ticket: 1 in 302,575,350.

Res Ipsa Loquitur

Home Prices Inflation Adjusted

Kumquat

Recession is here. The official dating will come later, much later. But the economy is slowing quickly. Commodity prices are falling due to lack of demand. Property – real estate – is slowing. China is struggling with Covid – and trying to infect the rest of the world with whatever variants they have incubated over the last couple of years. Europe is struggling with the Ukraine war and self-inflicted wounds from sanctions and immigration.

But equity markets don’t care. The S&P 500 looks to be making a bottom at a level that was the May bottom. The Dow seems to be heading for all time highs. Only the NDX seems to be close to a new low as some hypervalued “tech” stocks have been clobbered.

Something Is Rotten

Dr. John Campbell, who does a daily medical video, commented today that the real reason for China’s opening was not the white paper protests, but the reality that infections were already soaring. According to Dr. Campbell, people were bribing the labs or the lab employees in order to obtain a negative test, which then enabled the testees to go about their daily lives without restriction. However, they were spreading infection, which gave the virus a strong head start long before the Dec. 7 opening date.

Of course, this, if true and I certainly find it plausible, renders the PCR test requirement for travel to the US useless as it can easily be faked.

Not What You Think

I see numerous pieces observing that the NASDAQ 100 has lost 30% over the last year or so, True enough, but if you think the pain must be over, keep this in perspective. All of those gains were put in from mid October 2020 through late December 2021, about 15 months. And they were given up by October 2022, the NDX has flat-lined since. The 2009 lows are down 90% from here. Only 86% though if you take inflation since 2009 into account.

Inflation In Detail

Thanks to Visual Capitalist. Follow link for larger image.

Inflation by category

Money, Money, Money

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
A-ha, ah
All the things I could do
If I had a little money
It’s a rich man’s world

(Abba)

Money today is simply a claim on a bank. In the case of cash, it is a claim on the Federal Reserve Bank (Fed). Otherwise it is a liquid deposit in a commercial bank, S&L, credit union or similar institution which can be converted to cash. By law, any debt, public or private, can be settled with cash.

Banks do not lend depositors’ money. Or anyone else’s money. Nor do they lend their reserves (money banks deposit in the Fed). They create the money that they lend. The proceeds of a loan transaction are deposited in the borrower’s bank account. The money is not transferred from anywhere. The loan is added the asset side of the bank’s balance sheet and a  deposit is added to the liability side. This deposit becomes money because it now meets the definition of money (see above). This is also exactly what the Fed does when it monetizes Federal debt. It buys Treasuries (loans to the government) from a bank or other approved institution, which become Fed assets, and credits the purchase price to the seller’s Fed account. Which, by definition, is money.

If the loan is not fully repaid, eventually the loan is “written off”. In this case, the unpaid amount – loss – is charged to the bank’s equity capital.

Edit: Note that bank reserves are not included in M1, which is not affected by the Fed’s Treasury purchases from banks. Bank reserves are included in the broad money supply, the monetary base (MB).