They’ve Done It Again
The stars are back in their courses. The angels are back in the heavens. And the Perfections are back within sight…
For merely 148 trading days after bottoming… the S&P returned to record heights today.
The index closed the day at 3,389 — eclipsing its February 19 height of 3,386.
Thus Jerome Powell’s maniacal persistence has yielded a reward truly fantastic. He has successfully reflated the bubble.
The Federal Reserve has itself become the market.
Shannon Saccocia, Boston Private’s chief investment officer:
Equity markets are reflecting the massive monetary and fiscal stimulus that has been injected over the past four months… the rationale to diversify away from risk assets is hard to pinpoint.
For many the rationale to diversify away from risk assets is indeed hard to pinpoint…
No Longer Considered a Bear Market Rally
Bank of America has concluded its August Global Fund Manager survey. This survey revealed that:
The majority of professional investors no longer believe this market spree represents a bear market rally.
It is as genuine as gold itself, they believe.
What is more, 31% of those surveyed believe it is “early cycle” — the highest percentage since the financial crisis.
Meantime, Deutsche Bank reports, “companies have already restarted buybacks or are considering doing so.”
Buybacks were of course a primary source of helium for the bubble presently reflating.
And the Federal Reserve’s artificially depressed rates opened the taps…
Corporations Take on More Debt Than Ever
These exorbitantly low rates enabled corporations to pile on cheap debt.
With this debt they often purchased their own stock… which reduced shares outstanding… and raised the price per share.
That is, corporations often took on debt to conduct financial sorcery.
And now — as Deutsche Bank reports — the sorcerers are at their tricks again.
You might think corporations would halt the business during a recession. They would pay down debt and buttress their balance sheets against lean times.
Yet you would be mistaken.
This year corporations have gobbled down debt at a pace truly astounding — double last year’s.
And so conventional wisdom goes upon its head. Paul Ashworth, chief U.S. economist at Capital Economics:
During a standard recession, and that would include the global financial crisis as well, you would expect to see corporate debt as a percentage of G.D.P. begin to come down.
Thus the corporate debt bubble expands to astonishing dimensions.
And with the Federal Reserve backstopping nearly all grades of corporate debt… why should it not expand to astonishing dimensions?
It is a sad, sad caricature of capitalism.
Sin on a Mightier Scale
The pestilence presented the Federal Reserve two options. The first was to wash out the sins of the past decade.
The second was to sin on a vastly mightier scale.
Lance Roberts of Real Investment Advice:
Allow capitalism to take root by allowing corporations to fail and restructure after spending a decade leveraging themselves to [the] hilt, buying back shares and massively increasing the wealth of their executives while compressing the wages of workers. Or…
Bail out the “bad actors” once again to forestall the “clearing process” that would rebalance the economy and allow for higher levels of future organic economic growth.
The Federal Reserve selected option two of course. That is, it chose sin on a vastly mightier scale.
A crisis is no time for chastity, said Mr. Powell, taking his leaf from Augustine:
“Lord make me pure, but not yet.”
The Fed’s Diverted All Traffic
All the imbalances, all the fraud, all the dishonesty of the past are multiplying — by two, by three, by four, by five.
Rather than allowing markets to take the hard but necessary road to reality… the Federal Reserve has blocked off every route.
It has detoured all traffic into one single lane, heading north.
Put another way: The Federal Reserve has quieted capitalism’s mighty gales of creative destruction.
These are the gusts that blow away the inept and inefficient… and sweep in the new and improved.
Improved mousetraps, superior widgets, better living — all emerge from capitalism’s creatively destructive gales.
But the Federal Reserve has quieted the winds.
And so it is condemning the United States economy to a lost decade of stagnation… and anemia.
A Titanic Larceny of the Future
Plunging into debt introduces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.
And so investment in the future goes channeling backward. As we have written before, it is a titanic larceny of the future.
Explains Daily Reckoning contributor Charles Hugh Smith:
Debt has one primary dynamic: Borrowing money to consume something in the present brings forward consumption and income.
If we choose to consume now, we have less income to save for future consumption or investments. If we sacrifice consumption today, we have more money in the future for consumption or investing.
Those who brought their consumption forward can no longer add to present consumption, as their future income is already spoken for.
Each intervention piles up additional debt within the system. And the system sags under the added weight.
Progress slows as the laggards absorb capital — capital that could have flowed into worthier hands.
Yet the inefficient know they will not sink under. They know the authorities will keep them up.
Surprised at Being Surprised
But let us empty no more rain on today’s merry parade.
The stock market’s rapid patching surprises us in one fashion only: That we are surprised at all.
We should know by now.
Many and oft are the times we concluded the Federal Reserve was depleted of tricks.
‘The grand charade has finally ended,’ we gloated more than once. ‘The gods have restored balance to the universe.’
But despite our airtight logic and our faith in the righteous gods…
Each time we ended up slinking away, tail tucked between the legs, egg dripping from our face.
Since 2009, bulls have continually thumbed their mocking nose at bears. First at Dow 10,000, then 15,000, 20,000, 25,000… and 29,000.
Each point supposedly marked high tide — yet each time the water rose.
Then the virus promised the bearish fellows ultimate vindication…
Dashed Again — for Now, Anyway
“The bull market is ended,” many thundered. “We were right all along. Let’s see it recover this time.”
Yet recover it has… in a mere five months.
And so the process repeats.
In truth, we are not a committed bear. We are however a committed skeptic. Or rather, a committed realist.
Our eyes may be jaundiced, that is. But not closed.
And the stock market may yet be embarking upon another marathon run. We cannot say it will not.
We nonetheless do not believe the bears will be forever laughed off.
We suspect there is a hard, iron limit to central bank manipulation — even if we cannot yet identify it.
One day, however distant, there will likely be hell to pay.
And it won’t be the bears doing the paying…
Regards,
Brian Maher
Managing Editor, The Daily Reckoning
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