The major advantage of being 17 hours ahead of NYC during this week's market bloodbath has been the opportunity to offer pronouncements on the state of the markets at odd hours. Yesterday, I noted to a group of U.S. friends via a chat app, "There's a 50% chance the Fed will cut to zero tomorrow (Thursday.) There's a 100% chance I won't give a ...." You can probably finish that sentence. The Fed chose to attack the plumbing of the U.S. financial system instead, with a massive expansion of its repo program. To say the stock market was unimpressed would be to understate the fact after the worst one-day drop since 1987.
I was just reading some research from Jim Bianco, a market watcher whose work I follow closely, and his conclusion is that the markets have already priced in a Fed rate cut to zero on Friday morning. Okay, fine. Even if it doesn't happen Friday, we all know it's coming at the latest at the next FOMC meeting next Wednesday, March 18th, so I am not exactly sitting on pins and needles here in Beautiful Auckland.
This market move is beyond the sphere of the Fed. Finally. After three years of hearing nothing but Powell, Powell, Powell, we are finally getting a much needed selloff. Valuations as measured by all three classic measures (P/E, P/S and P/CF) were standing at 18-year highs on February 19th. That sort of exuberance has to be tamed, and, man, has Mr. Market done that with COVID-19 fears driving the quickest move into bear market conditions in U.S. history.
Bad monetary policy turns recessions into "crises" and market corrections into market crashes.
Twice in the past five years this market has tried to correct to more rational valuation only to quickly resume its move higher. In February 2016 -- when WTI crude oil prices hit an astounding $26 per barrel -- the market rebounded after the ECB cut rates into negative territory and JP Morgan (JPM) Chair Jamie Dimon pronounced the global economy to be healthy. That can't happen this time because the ECB's rates are so negative that further cuts would cause the entire European banking system to become unprofitable. Also, Mr. Dimon just had a major surgical procedure, so he's out of the punditry game for now, although I certainly have been heartened to hear reports of a positive prognosis for Mr. Dimon, as I have always been a fan of his work.
Fast forward to December 2018 and the markets were crashing again on fears of a trade war between the U.S and China. The FOMC clearly noted that its December 2018 interest rate increase would be its last and that its balance sheet reduction program -- quantitative tightening -- would be completed in 2019. That was the silver bullet the market needed.
Fast forward again to March 13th, 2020 and we have a Fed that already began another QE program in October of last year, and then added an emergency rate cut last week that the equity markets totally ignored. Do you see the pattern here?
What moves markets are second derivative actions. Changes in direction. From shrinking the balance sheet to growing it. From raising rates to cutting them. The Fed has no ability to effect such change now, and thus my complete and utter disdain for the imminent rate cut.
I just don't care, and it would seem that the market agrees with me.
I am not buying stocks here. We have about 100 S&P points to get to the buy point I have detailed in prior RM columns -- the 12/24/2018 closing value of 2,351 for the S&P 500 -- and if we touch that number tomorrow, I would not be surprised. I also will not be piling in.
The Fed inflated the U.S. equity market bubble over the last three years with a torrent of easy money. Watching them try to re-inflate that bubble as trillions of dollars' worth of unrealized capital gains are destroyed has been somewhat comical. It could also be quite expensive if their efforts are perceived to be ineffective (again) and that is a risk I am not willing to take for my firm, Excelsior Capital Partners.