The frenzy in stock markets

The story (before the big rally on Friday):

The S&P 500 has returned 37.7% over the last 50 trading days, making it the benchmark index’s largest 50-day rally in history, according to LPL Financial.

And if history is any indication, there could be more gains ahead.

Looking at the other largest 50-day rallies, the firm found that stocks were higher 100% of the time six and 12 months later. The average 6-month return was 10.2%, while the average 1-year return was 17.3%.

The firm crunched the data going back to 1957, which is when the index moved to a 500-stock model. [Link]

Another piece of news:

Using data from the timesheet company Homebase, University of California professor Jesse Rothstein and colleagues have identified businesses that shut down and are now reopening in real time. “It’s giving us a sense that reopening has gone faster than I anticipated. I would not have guessed that such a large share of firms have reopened at this point.

The most recent update from Rothstein and his colleagues using the Homebase data shows that about half the businesses that did shut down have reopened. “Reopened firms had collectively regained over half of their baseline hours and nearly 60 percent of their baseline employment levels. Almost 90 percent of this reemployment came through rehiring employees who worked at the firms before they shut down, as opposed to new hires,” he said. [Link]

Another piece of news:

Whether deemed essential or not, workers are being pushed by public policy and financial necessity back into restaurants, bars, stores, offices, warehouses, work sites, and factories. [Link]

The reactions:

(1) The jobs report, as an aside, was again skewed by reporting irregularities. Not just that, the payroll pop seems to reflect businesses re-hiring so as to get the PPP loans switched to grants. So put away that champagne! [Link]

(2) The CBO took a butcher’s knife to the 10-year US GDP outlook — $16 TN hit from the pre-Covid baseline trajectory in nominal terms. But hey — buy stocks! The SPX should now be valued on helium per share. [Link]

(3) Just imagine that most regular forecast forward earnings in the S&P 500 of 100 dollars a share. That would mean that at current prices the valuation goes up over 30 times. This is pretty mad. It‘s just an example of how markets are manipulated by central banks through quantitative easing. It’s so extreme, such a grotesque distortion that it’s almost embarrassing. [Link]

Deflationary bust, first and inflationary bust later

Extracts from an interview Louis Gave had with NZZ.CH (ht: Jesse Felder twitter handle):

Things have value for two reasons, either because they are productive, or because they are rare. Today, governments tell us to stay at home, while at the same time central banks are printing money like never before. In this environment, it’s pretty hard to be productive. So the money ends up flowing towards things that are rare.

Our economies are like super optimized athletes that have just received a big hit. How quickly can they be back on their feet? My fear is it will take longer than many market participants think. I’m not so optimistic that in a year’s time we’ll be back to normal.

The system is rigged, we’re going to make sure that asset prices will never fall, and we’re just going to print more money. Over time, that’s a terrible message. It kills growth and productivity. [Link]

This following point requires separate exposition

If I am a BBB issuer in the US, and the Fed will buy my paper almost regardless, why would I ever go to a bank to borrow money again? Those are unintended consequences. They may have solved the immediate crisis, but they planted the seed for another problem down the road.

See this comment, from another article:

“The reason why U.S. investment grade companies are able to issue at such scale is primarily that the Fed announced plans to buy corporate bonds in the primary and secondary markets. That turned everyone else into a buyer – before the Fed has bought a single bond,” Hans Mikkelsen, head of high grade credit strategy at Bank of America, wrote, ahead of Powell’s remarks. [Link]

Individual investors with time on hand, working from home, with zero commissions, have piled on to the market [Link]. Investors Intelligence Bulls now 46.6. Highest since late Feb. [Link]

What’s undeniable, though, is that retail’s fingerprints have been all over the rebound, raising questions over whether or not a true capitulation ever happened…..

…. At Charles Schwab, clients opened a record 609,000 new brokerage accounts, with almost half of them created in March alone. The firm saw 27 of its 30 most-active trading days ever, including every session in March, Schwab said. Omaha, Nebraska-based TD Ameritrade observed record trading, account openings and net new assets of $45 billion –about 60% of which came from retail clients, as opposed to institutions. [Link]

It is a different (and delightful irony) story that the investment strategist at Charles Schwab has this to say about what is facing the market and the economy:

“We really are in uncharted territory,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “We have a monster mash-up of the Great Depression in size, the crash of 1987 in speed, and 9-11 attack in terms of fear.” [Link]

Back to Louis Gave:

What do we know for sure? Well, we know that pretty much the entire Western world is going through a monetary and fiscal expansion like never before. Basically, they are introducing universal basic income financed by Modern Monetary Theory. UBI funded by MMT: That’s a game changer. [Link]

I agree with him. Eventually, this ought to be inflationary. But, when does the ‘eventually’ arrive? Good question. This chart shows that it might be a while. Do we have to pass through the ‘deflationary bust’ first like in Japan before we get to the inflationary bust of the Seventies? In other words, to borrow from Albert Edwards, the ‘Ice Age’ may not be over yet.

Source: https://twitter.com/VrntPerception/status/1255888544230445057?s=20

What else?

Gold. Gold has been outperforming pretty much every asset class since January 2018. This outperformance makes sense, given the current fiscal and monetary policy. A third very visible trend is the structural outperformance of technology. Again, you have to distinguish between tech for consumers and for corporates. The outperformance of tech for consumers makes sense to me. We all sit at home, order Amazon packages and play video games. I’m willing to go along with that. [Link]

On European Equities:

European equities underperformed on the way up and underperformed on the way down. That’s terrible. European banks continue to plunge to new lows. This is never a healthy sign for an economy. For an economy and a financial market to prosper, you need a healthy financial sector. It’s your beating heart. The reality is Europe has decided that in order to save the Euro, negative interest rates are necessary all over Europe. That’s killing the financial system. As long as we have negative interest rates in Europe, we can’t have a healthy financial system. And without a healthy financial system, I don’t see how Europe can ever hope to outperform. Sure, there are some good individual companies in Europe. But as a whole, the market sucks. [Link]

Copper is a germ killer:

Another good attribute of copper: Germs don’t like it. Germs stay on iron and other metals, but not on copper. So we might see that countries that can afford it will use more copper for things such as door handles, hospital doors and so on. This is what happened after the Spanish Flu: We started putting copper everywhere, which is why Art Deco looks so cool, because it has copper everywhere. That actually came out of the Spanish Flu and the knowledge that copper is a germ killer. [Link]

The Return of the Seventies

About two hours ago, the Federal Reserve Board (FRB) committed to buying unlimited amounts of US Treasury Securities and Mortgage Backed Securities.

More than that, the Federal Reserve is lending directly (almost) to businesses:

Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.”

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

This is unprecedented. The Central Bank is directly lending to the Main Street.

This took me to the piece that John Authers had written few days ago on the melting of the ‘Ice Age’, a concept proposed by Albert Edwards of SocGen.

There are two ways to interpret the calling of the ‘End of the Ice Age’ where Ice Age refers to low growth, deflation or very low inflation and low nominal bond yields.

End of Ice age and the arrival of helicopter money (see the Federal Reserve announcement above; it is almost there) which has been hastened by Covid-19 does not necessarily have to be an equity bull market. It could simply mean the end of the bull market in bonds.

In that case, we could have a return of the Seventies. Those were the years of stagflation. Bad bond returns and worse equity returns, in real (i.e., inflation adjusted) terms.

(1) Pl. see table below (Only USA):

Real Returns on US dollar instruments

Source: This is from the text book, ‘Macroeconomics’ by Dornbusch, Fischer and Startz.

(2) On Real S&P 500 Equity Returns:

(3) Nominal returns for S&P 500 are as follows and interesting:

Source: https://seekingalpha.com/article/2789035-s-and-p-500-index-returns-by-decade-since-1940 (accessed 23rd March 2020)

In the Seventies, nominal returns were positive mainly due to dividends and real returns were negative since the inflation rate averaged 7.2% per annum.

Now, American companies are not in the habit of paying dividends as the table above clearly shows. Therefore, nominal equity returns in the decade of 2020-2029/2030 could be low or negative and real returns even lower (more negative).

So, the end of Albert Edwards’ ‘Ice Age’ could hearld the end of the bond bull market rather than presage the continuation of the QE inspired bull market in stocks which had no fundametnal underpinning as David Rosenberg had pointed out.

So, quite why John Authers is ‘anxious’ (my impression, of course) to point to Albert Edwards as turning bullish towards equities or quite why Albert Edwards should be willing to let that impression prevail is not clear to me. Perhaps, it points to anxious personal hedging. It can be too lonely to be a bear in QE inspired world in which very few are willing to call the emperor out for his nudity.

It is worth keeping in mind that two wrongs cannot make a right.

SOX and Fed conscience

Record high in the semiconductor (SOX) index (with rapidly slowing end markets for semis and collapsing industry fundamentals)! Extreme (manic) speculation is back. Does the Fed have no conscience? (that’s a rhetorical question). [Link]

That was a tweet by Fred Hickey. I learnt about Fred Hickey from the Global Investment Strategy Weekly of Albert Edwards. Fred Hickey’s tweets also pointed me to the rather shocking slide in the quarterly results of Micron Technologies. See their press release here.

As per this article by Martin Wolf, we learnt that the Federal Reserve has done the following:

We learnt this month that the US Federal Reserve had decided not to raise the countercyclical capital buffer required of banks above its current level of zero, even though the US economy is at a cyclical peak. It also removed “qualitative” grades from its stress tests for American banks, though not for foreign ones. Finally, the Financial Stability Oversight Council, led by Steven Mnuchin, US Treasury secretary, removed the last insurer from its list of “too big to fail” institutions. [Link]

It is a good piece. Worth reading.

This is the actual news-story that Martin Wolf refers to, here.

Bubbly in London

I finished reading the short missive by Albert Edwards (of SocGen) on the ‘Help to buy’ homes madness in London – the brainchild of a Conservative (?!) government. It is tax-payer subsidised scheme to fund home ownership. Defies all logic. Albert Edwards warned the Chancellor that his act was nothing short of criminal.

Then, I read this comment on FT:

“In 25 years in the industry I have never witnessed such frenzied activity. Properties are typically selling 10-15% above asking prices. Help to Buy is little short of madness.”
By SPPang on London fuels record growth in UK house prices

QED.

Recent readings

Strip Greenspan of Knighthood, says Albert Edwards of SocGen. Amen to that.

Raghuram Rajan provides a good overview of how the Western world came to rely on debt-funded growth. Inexplicably, he refuses to identify his own stance in the piece. It is not that difficult to infer. He should have been explicit. But, his proposed solution that liberalisation of services sector in continental (Southern) Europe  and reliance on innovation and productivity sound theoretically nice.  But, doing them is going to be harder. One thing, economic prosperity is not a linear thing that can be extended into eternity. It is cyclical. Even if a nation engaged in victorious conquests on a regular basis, there would be limits to economic growth.

GMO folks have been active in FT. Edward Chancellor is cautious – and rightly so – in acknowledging the effectiveness of the actions of the European Central Bank in avoiding a liquidity crisis. He is cautious – and not rightly so – in not counting its costs.

Veteran Jeremy Grantham looks at the egregiously unequal society that the United States has become.

Marshall Auerback argues that the elephant in the room is Spain and not Italy. Sounds quite probable.