Are wild markets a late stage symptom of the policy disease?

 When can we be rid of this virus? No, not Covid, the Federal Reserve. 

Yes, I know, you think I am about to enter a conspiracy world of who owns the Fed and how it is all some cabal of Jeremy Corbyn's deepest and closest friends. 

Well, sorry to disappoint, but instead there is a huge story here. When Tesla fell on Monday 20%, erasing in truth only a month or so's gains, Bitcoin fell in sync. Suddenly, Jerome Powell, chair of the Federal Reserve, decided to remind the markets that the Fed would not remove the trillions of excess liquidity from the economy anytime soon. The liquidity is a feature, not a bug of the current system. 

The same is the case with our own Bank of England, but we have not had a huge run up in share prices and other assets like the US. Here, Government debt has easily absorbed all the extra debt created by the Central Bank. 

In the US, we are seeing crazy wild markets. Bitcoin and other digital currencies are hitting all time highs, SPAC's (Special Purpose Acquisitions Companies) are literally raised like South Sea bubble entities - "for reasons for which no one is to know the purpose." Sadly, I see the FT and lawyers etc rushing to promote shell companies in the UK and to try to get SPAC's registered here. 

SPAC's are a sign though, as are the crazed valuations of a few successful stocks. There is not much to invest in and there is far, far too much money chasing it. Private Equity sits on its largest amount of 'dry powder' - money raised but not deployed, ever. This is getting put into SPAC's to 'deploy' it but really it is just moving around savings and charging fees to the investors. 

With the markets the way they are, the underlying economy is in a wild phase itself with Covid smashing some sectors and boosting others. Forcing technology change in a year that would have taken a decade before. 

Central banks have created this monster and Governments love it - after all for them it is the magic money tree come true. Massive extra spending and no inflation. If inflation comes about then it is easy to cancel the fantasy QE bonds so goes the Central Bank theory and reduce money supply.

See below for what we are really doing though - a huge currency debasement strategy with apparently limited inflation impact. 

I am thinking hard on how this ends. In 2006, a huge run up in credit and debt ended in Great Recession, which was entirely predictable for 2 years beforehand. Here we see the Central Banks juicing the market and Covid providing both the spark but also the cover. My base case is the blow off phase lies ahead of us still - perhaps after another run up of asset prices. In reality the end phase must be some serious inflation or, if the Central Banks execute on slimming their balance sheets, huge deflation and bust. Either way, it is not a happy ending. 

How long can the markets be wrong this time?

The FTSE today closed at 5900. It is a long way off January's 7674 level  - a nice 24% down.

From just that you would expect a bad year, but actually this is a pretty shocking level to me in terms of resilience. The UK economy contracted 2.5% in Q2 and is expected to drop anywhere from 15% to 30% in Q3. This is much worse than 2008/9.

In 2008/9 it did take 6 months but in the end the market ended up 50% down for a short while, albeit with recovery also very sharp due to all the algo trading, so the low did not last that long, a matter of days and weeks.

This time though is it different? On the plus side the banks are not bust, on the downside....everything else is.

Another indicator is the oil price, which is rising slowly back towards $30 per barrel. Whilst this is a 50% drop so far this year, there ia a huge glut in the market. Look in the sky, there are no planes. It takes seven barrels of oil to make one of Kerosene. How, with Saudi and Russia still exporting, is the price holding up?

To me the answer to both questions above is twofold. Part A is there is a huge amount of trading going on and some people taking some very silly naked positions. The Covid situation may only just be beginning of the pandemic but the markets are pricing it in as if it is over. I hope they re right, but it seems a very risk-on for a position. Part B is the huge printing of money by the Fed and others to give liquidity to the banks has seeped, as always, into assets. Fake money swapped for real assets by those happy recipients banks. This is the desired effect as far as the central banks are concerned.

I don't but it myself, when the next set of GDP figures come out or anyone one of hundreds of potenitla covid-related bad news stories the markets are going to head back down at least a thousand points on the FTSE, two thousand it events go badly. Apparently the markets can stay wrong longer than I can stay solvent....doubt it this time but I guess we will see.

Beware the Ides of October?

It is an easy post to write every year, that stock market crashes happen in September and October. The major ones nearly always do, but the evidence is more mixed in years when there is not a major crash. The 3 largest declines in  recent times though are 1987, 2001 and 2008 - all those happened in September or October as did the Wall Street crash.

Since the beginning of September 2014, the FTSE and other markets have been hit pretty hard, as can be seen on the chart above. After a peak at very nearly 7000 in early September the FTSE is off to no only a year low, but touching the low for last year too. In fact you have to go back to the tail end of the Euro Crisis to find the FTSE performing so badly.

There are, as ever, many causes for this, one of the main ones is the FTSE still being resource stock heavy so the fall in Oil and Mineral prices - generally good news for the world in terms of inflation and prices, turns into bad news for the FTSE.

However, it also shows that finally the geopolitical effects of ISIS, Ebola and Russia are having an effect on the global sentiment. The latter is more or less forgotten, but in reality the sanctions are causing major dislocations in the oil markets - which is what the West aimed for, but still, the world is not harmonious.

Worse for the pension investors and others is that none of the above 3 issues is going to go away. Nor are the falls in resources prices, although they may level off - albeit another 10% down or so from here.

We'll just have to hope the Santa rally kicks in from next month as per usual!