Is the “Melt-up” Back

The opening pistol popped this morning and the stock market came blistering from the gate…

The Dow Jones was instantly over 200 points ahead of yesterday’s close.

Under full steam it went, agallop, the other major averages neck and neck.

All three raced past existing records.

The president roared from the grandstand, hoarse with glee:

“Stock Market up big today. A New Record. Enjoy!”

We did — vastly — if only for the sheer sport of it all, the unbridled exuberance, the manic thrill.

The pace slackened eventually.

The Dow Jones nonetheless ended the day 182 points to the good. The S&P gained eight points on the day; the Nasdaq, 24.

Gold, meantime, absorbed a savage trouncing today — down $24 and change.

And 10-year Treasury yields increased to 1.94% today, a good stretch from early September’s 1.43%.

Rising long-term yields suggest improving economic conditions to come and brightened animal spirits… as a general rule.

The question then becomes:

To what do we ascribe today’s joy at the racetrack?

Here is the answer:

Rising expectations that a trade deal with China is on tap.

Rumors of Peace

Reports Bloomberg:

China and the U.S. have agreed to roll back tariffs on each other’s goods in phases as they work toward a deal between the two sides…

Was Bloomberg merely fanning beautiful gossip to catch a crowd?

Evidently it was not.

By way of confirmation, a spokesman for China’s Ministry of Commerce:

In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement…

If China [and the] U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement.

The computer algorithms were patrolling the news wires overnight. They seized upon the headlines and let out the word.

Hence this morning’s lovely run.

United States officials confirmed the news this afternoon.

But come we now to this next question…

We raised it briefly in yesterday’s reckoning, but today we raise it anew:

Is a “melt-up” now in prospect?

Catalysts Taking Shape

In review, a melt-up is the glorious terminal phase of a bull market, when stocks reach fever heat — before melting down.

It is a sort of unshackled mania, a delirious fever, a lunacy unchecked and rampant.

Again, in the 18 months prior to the Crash of ’29, the stock market nearly doubled.

And the Nasdaq went amok 200% in the 18 months before the dot-com mania derangement in 2000.

So… is the market verging upon another melt-up as the calendar nears 2020?

Our spies report murmurings to that very effect. Some of these whispers begin to circulate publicly.

For example, the director of macro strategy at Prism Financial — a certain Mark Orsley — reports that market conditions trend this way.

That is owing to fresh central bank liquidity (see yesterday’s reckoning), a successful trade resolution… and fiscal stimulus from the European Central Bank.

Mr. Orsley:

For the first time all year, all three potential catalysts [are] emerging at the same time, which risks a Q4 melt-up in risk assets…

Does this embolden the… melt-up thesis? Definitely.

Shall we bring forth evidence dramatically in point?

From Greed to Extreme Greed

Let Exhibit A go into the record — CNN’s Fear and Greed Index:


As revealed, investor sentiment has passed from mere “greed” to “extreme greed” in the space of one week.

Ninety-one out of 100 it scores, such is current investor greed.

Only one month previous investors were under the covers, red with fear. One year previous they were desperately under the bed itself — in extreme fear.

And now they are rapturously over the moon… green with greed.

Is their greed justified?

“Perhaps We Should Be Surprised that We Are not even Higher Yet at this Point”

Analyst Sven Henrich of NorthmanTrader has also gotten wind of these melt-up rumors.

He does not necessarily believe them — he believes the market faces too much cooling resistance to melt up and away anytime soon.

He nonetheless understands the grounds for speculation:

Lots of chatter about a coming melt-up… in stocks. And why not?

In the Fed’s desperation to control rates the TINA (there is no alternative) effect is back and money again appears to have little choice but to allocate back into equities…

The constant distortions now accentuated by the need to “calm” money markets have brought us back to the old QE days… This week markets hit 145.8% market cap to GDP and may even move higher… Given the overwhelming amount of liquidity that’s being thrown at these markets, perhaps we should be surprised that we are not even higher yet at this point.

The “overwhelming amount of liquidity,” as we explored yesterday, is presently draining in from the Federal Reserve.

It’s Just “Open Market Operations”

Since September, the New York Federal Reserve has emptied in some $250 billion to liquify money markets.

A healthful portion of that $250 billion is no doubt funding speculative activity on Wall Street.

Meantime, the Federal Reserve concedes the faucets will remain open now “at least” through 2020’s second quarter.

But the monetary authorities are eager to denounce anyone daring to call it quantitative easing.

No, they insist — they are merely conducting “open market operations” to keep the financial machinery whirring.

And in the particulars they may be correct.

Unlike quantitative easing, these operations are not orchestrated to stimulate an economy.

Yet as we also noted yesterday:

These open market operations expand the Federal Reserve’s balance sheet… as if they were quantitative easing.

It’s Not QE — But What’s the Difference?

From its $4.5 trillion maximum, the Federal Reserve’s previous quantitative tightening (2017–19) reduced the balance sheet to $3.8 trillion.

And now?

The balance sheet once again exceeds $4 trillion.

Let Exhibit B in support of melt-up enter the record:


We have every expectation that the balance sheet will increase yet. As it does, we expect the temperature to increase with it.

The stock market will begin to sweat, pant and bubble.

But will it sizzle over into full melt-up?

The Devil’s Advocate

Advocatus diaboli — the devil’s advocate — has entered the courtroom…

He reminds us that the trade war is nowhere near peaceful conclusion — despite recent developments.

And that impeachment may also rain down freezing water. Other pitfalls, he reminds us, lie in wait.

No, the way ahead is far from certain.

The answer, we must conclude, is on the knees of the gods.

And they are silent…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning