Investors seem to imagine that slightly encouraging pandemic news will somehow beget improved economic news. Shares rallied for a third straight day, evidently because the deadly tide of contagion appeared to be receding somewhat in Italy and China. Even that story was a bit muddled, since there were reports that a second wave of Covid-19 was rolling through Wuhan. Regardless, the small businesses that are the backbone of the American economy face a long, difficult slog toward normalcy, assuming anything approaching it ever returns. The Fed has made a mighty effort to ameliorate the pain in the meantime, providing a credit lifeline to tens of thousands of businesses that are not generating any cash. Far more daunting than their cash-flow problems, however, are the challenges of staying solvent. My colleague James A. Kostohryz has some sobering thoughts on this subject in an article he posted at Seeking Alpha, How The Intrinsic Value Of Common Equity Shares Will Be Destroyed In This Crisis. The discussion that follows is worth a read as well, since it suggests there are still plenty of investors who expect a v-shaped bottom and who are ready to pounce on stocks at the first encouraging sign. This is in stark contrast to my prediction that the Dow Industrials will trade well below 10,000 before the bear market has run its course. You can read Kostohyrz’s essay by clicking here.
One good rally and everyone’s bullish! How else to explain yesterday’s abortive attempt to do it again? Just as traders came to their desks Monday morning looking for stocks to plummet, on Tuesday they evidently thought the Dow was going to tack on another 1000 points. When it did so early in the session, it was easy to think this was the start of another monster move. To the contrary, stocks peaked on the opening bar and it was mostly downhill from there. Moreover, weakness in the final hour would have challenged the resolve of anyone bent on bottom-fishing. The fleeting, bull-trap opening was not quite strong enough to get AAPL or the E-Mini S&Ps to their respective targets. The shortfall in either case was not large, but the subsequent selloff had some subscribers wondering whether I was still confident the targets will be reached. The answer is yes, mainly because of the way AAPL impaled a Hidden Pivot midpoint resistance on the way up Monday. This sort of price action usually means the target associated with the midpoint resistance will be reached. In AAPL’s case, it sits at 282.45, a little more than $10 above Tuesday’s intraday high of 271.10. That high occurred almost precisely at a ‘secondary pivot’ shown in the chart that stood to be a potential stumbling block for bulls (as I’d noted in the Trading Room). The $12 decline that followed was brutal, but it did little technical damage to AAPL’s intraday charts. Doomed Rally As for the E-Mini S&Ps, they peaked at 2750, somewhat shy of the 2783 target I’d proffered. A trend failure at or near the secondary pivot is concerning, since reversals from very close to this level often accelerate. For now, though, I’ll stick with my forecast that the E-Minis and AAPL will achieve their targets. I’ll be checking their vital signs frequently nonetheless, since the broad averages are doomed to collapse when this rally is spent. Shortly thereafter, when all of the dim bulbs who’ve turned bullish so quickly begin to understand that the damage the economy has suffered will take a long, long time to repair no matter when the virus subsides. Indeed, business is unlikely to return to “normal” ever.
The stock market wafted last week into a psychologically surreal zone somewhere between terror and, if not greed, then at least jittery optimism. How can stocks rally at all when no one can predict whether the deadly spread of coronavirus is about to overwhelm America as it did Italy? The economic picture remains just as murky, since odds the global economy will fall into a full-blown depression are probably no better than 50-50 right now. Granted, two trillion dollars worth of consumer stimulus is bound to produce short-term benefits and a fleeting bounce on Wall Street. Were you aware that much of that money is in the form of loans that will allow employers to avoid laying off even a single worker? The loans are structured as gifts, and if you borrow a few million dollars now and don’t furlough any employees, there’s reportedly a good chance the debt will be forgiven. This effectively creates a months-long paid vacation for the idle at the expense of those who are working. Or perhaps not; for if those still on the job are not taxed at some point to pay for this epic giveaway, the money will have come, so to speak, from trees. To use another metaphor, it would be the torrent of helicopter money that Ben Bernanke famously asserted could prevent the U.S. economy from getting crushed by deflation. An Ethereal $88 Trillion Could halting the reversal of American’s long run of prosperity be as simple as printing tons of money? I somehow doubt it. But I am still not quite ready to cede the endgame to the inflationists. For even if a series of bailouts injects as much as $2o trillion into the system, that would still be far less than the sum remaining to be deflated from the asset side of America’s ethereal balance sheet. At early February’s peak, we owned in the aggregate about $32 trillion dollars worth of residential real estate, $16 trillion of commercial property and $40 trillion in stocks, for a total of $88 trillion. This sum was effectively reduced by $15 trillion when the stock market bottomed on March 23. Does anyone actually believe the low is in? In any event, real estate has not yet begun to collapse because transactions have temporarily dried up. But when price discovery returns to this crucial store of the nation’s wealth, it stands to be an even more powerful deflator than falling share prices. Indeed, were property values to fall as hard as they did during the 2007-08 crash, it would reduce the private sector’s balance sheet by a further $16 trillion. So where does that leave us? Better sit down for this, because those assets, all $88 trillion worth, are just a drop in the bucket compared to the financial derivatives edifice for which they, along with the world’s supply of oil and natural gas, are the chief source of collateral. Financial derivatives constitute a $1.5 quadrillion-dollar market — that’s $1,500,000,000,000,000 — and even a thousand helicopters filled with Benjamins could not keep this black hole from imploding once the process starts. Nor is it certain whether Nancy Pelosi and her ilk, presented with an unparalleled opportunity to give away vastly more OPM than all of their predecessors combined, will be able to muster the crazy gumption to undertake fiscal countermeasures commensurate with the problem. All Eyes on Illinois But here’s the wild card: the great state of Illinois, birthplace of Abraham Lincoln and Ronald Reagan. Its pension plan is headed toward certain bankruptcy, undoubtedly sooner rather than later, and it remains to be seen whether Uncle Sam will go “all-in” attempting to save it. If so, you can be sure that two dozen other tottering states, including California, New York, New Jersey, Connecticut and Massachusetts, will scream “Help!!” I rate the political outcome a toss-up, because even the dumbest lawmaker on Capitol Hill — AOC, to name names — can probably see that only a hyperinflation could result. This would not be your grandmother’s QE, where the mountebanks who run the central bank are tasked merely with pumping up stocks and real estate via easy credit. No sirree, this is the kind of monetization that would require sending out checks every month to more than a million recipients. Provide the same free lunch, in perpetuity, to every public-job retiree in every tottering state, and Fed helicopter money would soon lurch toward infinity. The predictable result after just a few months is that the $1687 check the Illinois DOT retiree receives every four weeks would buy a meager assortment of groceries. This outcome is so obvious that even Pelosi and AOL would see it coming. That doesn’t mean we can rule out an open-ended bailout, since it is politicians and their lackeys on the Open Market Committee who would decide. Assuming they agree, as is their wont, that “Voters will LOVE this!” we are no longer talking about a mere $20 trillion bailout, but one with no practical limit. This would come on top of national debt that is already at $23 trillion and growing by an unprecedented $500 billion a month. The Guvmint will eventually have to cap interest rates, since allowing them to rise to market levels would raise the burden of debt for all of us to a fatal threshold. Under such circumstances, the Fed would become the only buyer of Treasury paper — not because the banksters are economic dunces, which they manifestly are, but because their role as lender of last resort remains legally unconstrained and politically unimagined. Boxcars of Digital Money Before hyperinflation erupts with the force of ten H-bombs, I expect deflation to play out ruinously in the private sector, impelled by a crash in real estate, commodities, household and business income. When the Guvmint comes riding to the rescue in a way that dwarfs the paltry trillions advanced us so far, that’s when hyperinflation will take off. It will probably play out more quickly than the Weimar hyperinflation of 1921-24, since the means to effect it are digital rather than via boxcars stuffed to the roof with paper currency. This scenario will be extremely tricky for those who would secure their economic future with gold and silver. That’s because bullion will be trying urgently to separate out the mere suspicion that fiat currency’s days are numbered from the actual moment of its inevitable demise. Although I have long doubted gold could soar to the sensational heights predicted by some seers, I am now open to the possibility. I have remained firmly in the deflationist camp for more 30 years because I believed cumulative debt would eventually act like a black hole, sucking us into its maw so slowly at first that we would not feel the pull until it became irresistible. The pandemic has altered this dynamic by giving politicians and banksters a popular excuse for making mind-blowingly reckless decisions that are happening too quickly to challenge or resist. If the courage and sanity to oppose them exists, it will surface in token op-ed essays by the few who understand why money needs to be backed by something scarce that has real and enduring value.
My colleague Bob Hoye saw a yield curve inversion that occurred in July as reason to prepare his subscribers for the stock market crash that has ensued. Every inversion since 1857 foretold a recession, suggesting that even without the pandemic, shares were headed for trouble. Still more concerning, he notes, is that the curve inverted twice this time, a rare and especially ominous event seen only in 1873, 1929 and 2007. These were all memorable years in the annals of economic ruin. Will we be fortunate enough to escape with something less this time? The next few weeks may hold the answer, but prayer couldn’t hurt.
Traders looked beyond the two-week national ordeal that officials have diligently tried to prepare us for and evidently saw more ordeal further down the road. The Dow dropped a thousand points on Wednesday, but there was no fear, just a mood swing back toward darkness. It will surely pass, at least briefly, but don’t take that as a guarantee of a rally by week’s end. I’ve projected much lower prices for stocks and expect the Dow to trade under 10,000 in search of a bear-market bottom perhaps two or three years from now.. We are all hearing so many scary personal stories these days that it’s difficult to judge whether it is anecdotes that are collectively weighing down shares on a given day or more-arcane concerns, such as the central bank’s extraordinary efforts to keep real estate paper from imploding. It is unavoidable that the tangible side of this problem — the impending plunge in commercial and residential property values — will make the Fed’s death-defying paper-shuffling act seem like a relative walk in the park. Jim Grant, the most learned observer of interest rates around, puts this grave problem in perspective in an interview posted at Dudley’s Reports. Noted Grant, “If you can conjure, without adverse effects, trillions of dollars of new credit and everything is better because of that, net better, you know? Wow, I suppose we wish that had been discovered in the Iron Age. We would be a lot richer by now.”
America is in the eye of the storm, hunkering down for what Mr. Trump promises will be a “very painful two weeks.” Some may have gotten the impression that the economic pain could begin to ease then, but he was talking about the death toll and the rising count of infections. No one can say how long the economic fallout will continue, but the most optimistic estimate I’ve seen suggests the nation will lose perhaps a quarter year’s production. If so, that seems manageable, especially when you add in the Fed’s $2Tr rescue package and stepped-up unemployment benefits that in most cases will equal lost pay. Fear seems to have ebbed from the stop market in the meantime, even if there is insufficient enthusiasm at the moment to push stocks into a sustained rally.
Over the weekend, we learned enough about the virus to understand why things won’t be trending even remotely back to normal by Easter, as some may have hoped. Grave uncertainties will remain for possibly much longer, including whether spring break will turn out to be a devastating vector of contagion. In early January, a friend’s son, big (6’3″), strong and healthy, was among the first Americans to get what turned out to be coronavirus. He is a math student at a top university in Boston, and this was shortly after many of his Asian classmates returned to the U.S. after visiting their families over Christmas. Initially he experienced a sore throat and a 105 fever. Doctors were not looking for Covid-19 back then, and so it took ten days for them to order up a scan that revealed viral pneumonia. Thirty days later, he had not completely recovered, although the most debilitating symptoms had abated. He might just as easily have died. His mother, who lives in South Florida, is asthmatic and remains in a very strict state of self-quarantine. She does not leave her home for any reason, receives no callers, and scrupulously sanitizes any food or packages left at her door. An interesting side note is that the son had developed an algorithm for predicting the markets. When it went haywire just ahead of the signal plunge on Monday, February 24, he advised his mother and 95-year-old grandfather to sell everything. They did so, on Friday, February 21, sidestepping the market’s collapse. Dow Headed Below 10,000 At Rick’s Picks, we continue to observe the pandemic’s effects mainly in the way it is affecting shares and commodities. Our analytical tools are purely technical, and they have proven useful in making tradeable sense of the violent price swings that have occurred this month. They have also kept us from becoming overly enthusiastic toward the rallies, which are driven by a combination of panicky short-covering and timely, supportive bids from institutional traders. The remarkable skill of the latter was on display last week in Boeing, which soared from a low of 89 a week ago to 186 on Friday. This is how the so-called smart-money will continue to profit mightily regardless of the trend. But make no mistake, stocks are ultimately going MUCH lower, and all rallies for the foreseeable future are destined to fail. I expect the Dow to trade below 10,000 before the bear market has run its course, and conceivably below 5000. Financial advisers will be telling clients to sit tight, and this will only make the coming economic depression even worse, especially for Baby Boomers whose retirement assets are about to be decimated. An item at Bloomberg,com crystallizes the bad advice that will help make this so: “Black Rock’s Larry Fink says now is the time to get back into equities.” Jim Grant, responding on LinkedIn, had but this to add: “Did he ever recommend getting out?” Each of us can sense, in our own lives and in the lives of those close to us, the pandemic’s grave potential. Do not assume that “the market,” supposedly omniscient and infinitely wise, can somehow remain oblivious to threats that we as individuals perceive clearly and knowingly. In the weeks and months ahead, it cannot but further discount the radical changes that are occurring in our lives and the economy, many of which could persist for a long while.______ UPDATE (Mar 30, 10:15 p.m. EDT): DaBoyz have shaken out small investors and are in complete control, just as they were in Boeing for nearly an entire year. Recall that a relentless stream of appalling headlines failed to push the stock below $300 until the pandemic game along. BA eventually fell to 89, providing a glimpse of what will happen when some headline comes along that will shock even the Masters of the Universe into a death dive. In the meantime, they will continue to distribute as much stock as the rubes and short-covering bears ae eager to buy.
The U.S. dollar took a massive hit in stride following last week’s announcement of a $6 trillion bailout package. The news caused the greenback as measured by the Dollar Index (DXY) to fall by just a few points from recent highs. The dollar’s seemingly inexplicable strength is a harbinger of the catastrophic debt deflation I’ve been warning about for many years, since it will increase the real burden of debt on all who owe dollars. It also shows how the dollar can be subject to short-covering pressure capable of pushing its value far above any logical threshold, even when the Fed is practically giving away dollars to the rest of the world. Let me explain. At present, exceptionally strong demand for dollars is being driven in significant part by liquidity issues originating in Japanese financial markets. Like all central banks, the Bank of Japan has usurped the role of debt markets in order to create a nearly unlimited supply of money to prop up the economy. One way it force-feeds yen into the system is by buying Japanese government bonds held by dealers. Dealers have been reluctant to sell lately, however, because they need the bonds to collateralize short-term borrowing in U.S. repo markets. They are more eager than ever to borrow dollars because the Fed has made them so cheap. ‘Opportunity Moves to Size’ The Fed’s intention in backstopping global markets with an effective $4 trillion credit line, in addition to a $2 trillion consumer stimulus, was to avoid a run on financial markets. Instead, the banksters may be about to discover that they have stimulated infinite demand for U.S. dollars. I once wrote about this in the context of my experience as a floor trader. One might think that if, say, IBM shares were trading in 50,000-share blocks, that a million-share offer from out-of-the-blue would overwhelm bids and depress the stock. In fact the opposite held true: As soon as the huge offer was “advertised” on trading screens around the world, arbitrageurs would figure out ways to make use of it, often by shorting call options or buying puts as hedges. Like piranha, they would nibble at the offer at first, until the smell of blood attracted enough feeders to pick the carcass clean in a frenzy. Opportunity moves to size, as traders say. Unfortunately, the Fed may soon discover how this applies to dollars now that the banksters have stimulated effectively unlimited demand for them. [A debt of thanks to ZeroHedge for stimulating my thoughts with this article. RA] _______ UPDATE (March 26, 8:10 p.m.): Sellers accelerated the tempo of the dollar’s recent decline, but I still expect it to be short-lived. The next rally will be linked to troubles in global financial markets that have been building for years. They are not going away any time soon.
To My Readers: I have sent the following note to Sean Hannity, Rush Limbaugh and Holman Jenkins of the WSJ Journal. It is a MUCH better idea than squandering $2 trillion sending out checks to…EVERYBODY. Here is what the President needs to do. Forward this to your Congressman if you agree: President Trump needs to mobilize the Army to set up Civil Conservation Corps/WPA-type work camps to rebuild America. Virus-test each recruit who shows up, train them, then put them to work. The mobilization would be similar to the WWII effort, when crash courses turned no-nothings into navigators, bombardiers and radiomen in mere weeks/months. Taxpayers would be getting a much better value for their $2 Tr than sending checks/debit cards out to every household. This would be a huge political winner for the President, but also for America. Everyone has talked about rebuilding America’s infrastructure, but this is a great opportunity to actually do it. Sincerely, Rick Ackerman
The pros who confidently bought the dips for more than a decade are now quietly selling the rallies. During the bull market, accumulating stocks on weakness was a no-brainer, as easy a ticket to big profits as investors will ever enjoy. But the bear market has ended this rare opportunity. Instead, the Masters of the Universe have been unloading as much stock as they can into every rally. This tactic was clear on Friday in the wee hours, when shares rose sharply on gaseous volume while most of us were sleeping. The intent to distribute was so obvious that Rick’s Picks put out a recommendation at 5:34 a.m. to short the E-Mini S&Ps. (Here’s the actual post in the Trading Room. The futures subsequently fell more than 200 points.) Only a few subscribers were able to take advantage of this guidance, however, because of the ungodly hour. Get used to it. Short-squeeze spikes tend to occur at times that are either inconvenient or intimidating to most traders: on Sunday nights; in the final hour on Friday; on the opening bar of day sessions. Rinse and repeat. How to Recognize Distribution Distribution is the name of the game these days, and you will need to understand how it works if you want to survive the bear market. We saw a sustained example of it in Boeing [BA] when shares held above $300 for an entire year while scandal engulfed the company. After deftly unloading as much BA as possible during that time, DaBoyz pulled the plug and the stock plummeted to $90 just ahead of the pandemic selloff. Equally adroit was the outwardly gentle distribution of U.S. shares that occurred in early February. You may recall that the stock market hovered defiantly aloft for weeks, even as coronavirus stories out of Wuhan turned increasingly menacing. Is the stock market crazy, or what? That’s what we wondered at the time, but the bullish behavior of the broad averages mildly persuaded most of us that the virus would remain China’s problem. The seeming invincibility of stocks would have affected our political leaders as well, reducing their urge to snap into action when, it is now alleged, they should have hit the panic button. A few congressional scumbags — a redundancy, I know — rose to very the top of America’s political shit-heap by selling millions of dollars worth of stocks just ahead of the crash. Sens. Dianne Feinstein (D-CA) and Richard Burr (R- NC) have been named, but you can bet there were others. They had been privately briefed on the pandemic threat on Jan 24 by Anthony Fauci, head of the CDC. Delicate Work Lately, the delicate task of distributing AAPL shares without frightening the unwary has become one of DaBoyz’ most urgent concerns. The company, by virtue of its enormity, stands to become one of the biggest corporate losers in the world as the pandemic intensifies assembly and distribution problems. The devastating hit to sales will come later, amidst a global recession-or-worse — most particularly in China, iPhone’ second-biggest market. Rick’s Picks had projected minimum downside to $235 when the stock broke below $287 a couple of weeks ago, and we held to that target even when a violent short-squeeze goosed AAPL from $248 to $279 in a day. The stock crashed through $235 on Friday, however, suggesting that lower prices are coming — perhaps much lower (i.e., under $100). But if you had been glued to the tickertape on Friday, you might have believed AAPL was a tower of strength, since it held in positive territory until the final hour. What telegraphed its day-ending collapse, an unsettling drama that led the entire stock market lower, was DaBoyz’ inability to pad AAPL with sufficient gains to resist late-session selling. It was trading up $2-$3 for much of the day, but that was not quite enough to fool the herd into thinking the market might rise into the closing bell. Instead, still smarting from having bought into last Friday’s run-up, and having come to understand that weekend news concerning the pandemic is still most unlikely to be hopeful, they dumped shares en masse. Depression Odds Grave uncertainties remain concerning how much wider and deeper the virus will spread, and how much longer the U.S. economy will remain in a state of seizure. Under the circumstances, it seems unlikely the bear market has seen its worst. Short squeeze rallies, some of them powerful enough to persuade the rubes and their financial advisers, will persist nevertheless, abetted by smart money that will know exactly when to get out of the way. Realize that stocks will be rallying not necessarily because the pandemic prognosis has improved significantly, but for technical reasons that will make us think the contagion and its economic effects have taken a turn for the better. At some point one of these rallies could turn out to be the real McCoy, intuiting correctly that the worst is past. But if this doesn’t happen within the next three-or-so weeks, I’d say that chances of a global Depression are around 50%._______ UPDATE (Mar 23, 5:28 p.m.): Maybe it’s just me, but shouldn’t stocks be getting more lift from the Fed’s apparent all-in commitment to backstop…everybody and everything? I wrote here earlier that the actual stimulus effect that would result from sending out thousand-dollar checks to Jerry Springer’s audience wouldn’t amount to much. But even so, stocks are suppose to rally on the news, then sell off when sales of Cadillac Ecalades, bass-fishing boats and billiard tables start to pick up.
The U.S. dollar has been one of the few big market winners lately, but this is hardly a good thing. If the greenback continues to strengthen, it will hurt U.S. multinationals whose overseas revenues are reckoned in currencies that would be falling. In addition, all who owe will need to repay their loans in dollars more dear than when they were borrowed. And it will sink prices for a broad variety of commodities, particular crude oil, that have been used to collateralize a super-leveraged derivatives market worth perhaps $1.5 quadrillion notional. Do you see the problem? Throughout its 25-year history, Rick’s Picks and its predecessor, Black Box Forecasts, have never wavered in their bullish outlook for the dollar. In recent years, our projection for the Dollar Index (DXY), currently trading around 101, has called for a test of highs near 120 recorded in 2002. When DXY slid to 71 between 2002-08, we saw this as merely corrective. What a Fool Believes Our outlook for the dollar is congruent with the deflationary bust we foresee puncturing the outsize asset bubble created by the central banks over the last 40 years. Residential real estate is a big piece of it, and you can imagine for yourself whether mortgage lenders will ultimately allow homeowners to pay off their loans with a few hundred-thousand-dollar bills peeled from their overstuffed billfolds. This is just one of many reasons why a hyperinflation is not coming. Set against them is the entrenched belief that the Fed would never let deflation happen. Well, on Tuesday, the dollar, along with the real burden of debt, soared despite the fact that President Trump was offering up a trillion dollar stimulus package in an attempt to offset economic damage from the pandemic. Ordinarily we would have expected the dollar to reel from news that amounted to the most powerful inflationary shock it has ever received; instead, it rose sharply. This was a wake-up call not only for the fools who still believe the Fed is all-knowing and all-powerful, but for those who think debt doesn’t matter. [Note: Here is a link to an interesting essay from Raoul Pal at LinkedIn: “The Dollar Wrecking Ball”. It dovetails precisely with this commentary.]
[Note: This commentary now strikes me as having been w-a-a-a-y too bullish. Some important things have changed since I published it. For one, the $1 trillion+ stimulus package is already a transparent failure — not just psychologically, but of political leadership. Does anyone — other than eggheads and some politicians — actually think it will stimulate anything? Absolutely not. And there is this: Spring-break revelers have introduced grave uncertainties that will persist for at least another four to six weeks, until we can be sure they have not jump-started a contagion that the nation has paid an extremely high price to suppress. The stock market cannot possibly sustain a rally under the weight of such anxieties. RA] If you’re feeling depressed because your retirement fund has been cut in half by the Covid-19 avalanche on Wall Street, take heart because you may have a good chance to get it back. Yeah, I know, I wrote here only last week that the bear market would stretch on for years, bankrupting us all and ushering in the Second Great Depression. But watching the spectacular collapse of Boeing shares has made me more of an optimist. The stock has plummeted from $350 to $129 in a little more than a month, wiping out more than $150 billion of capitalization. It is the swiftness of Boeing’s fall that I find most encouraging, since this could have happened only if the stock’s canny institutional sponsors wanted it to happen. Why on earth would they? Simply because they are quite confident they eventually will recoup their investments — and perhaps even a little something more for their pain and trouble. Throwing the Switch And I don’t mean to imply that it will take years or even months for them to get back to flush. More like two or three weeks once the Masters of the Universe sense the exact moment pandemic fears have ebbed sufficiently for them to throw the switch. The story that will enable them to do so is unpredictable. It could be an air carrier adding back flights, or a couple of restaurant chains re-opening with splashy promotions and appealing new menus. It might be an accretion of evidence over the next several weeks that the virus has failed to spread as successfully as it did in Italy. It doesn’t have to be much of a story, and it might even take two or three days for it to get rolling. But when it does, DaBoyz will know exactly when the time is right to pull their offers, setting in motion what promises to be the biggest short-covering panic ever. It will be the reverse of what has occurred as bids have been withdrawn, and it will move the entire constellation of U.S. stocks with the take-no-prisoners ferocity of TSLA’s moon shot in December/January. The stampede will restore trillions of dollars of valuation to America’s balance sheet as quickly as they were lost. I am no raving bull, as readers will already know, and I came to regard the ability of Boeing shares to remain stubbornly aloft when the company was engulfed in scandal as morally repugnant. Their negligence, after all, had caused the deaths of 346 passengers in two 737 Max crashes. The crown jewel of American manufacturing prowess became my bête noire, churning my stomach every time Boeing stock lifted like a pixie on news of some ethical lapse, corporate blunder or woebegone confession. A solid year of pounding and negative press failed to push BA below $300, barely a third off its $450 record high. After the stock took its initial lumps, it became increasingly clear that DaBoyz were prepared to hunker down and hold BA steady for as long as it took for the squall to pass. The Fix Is In But when the pandemic hit, the Masters of the Universe who control BA realized they were outgunned and they let it fall. And while individual shareholders may be reckoning their losses in pints of blood, the portfolio managers whose bread Boeing buttered for a decade are salivating at the prospect not only of making it all back, but of doubling their money on shares they are buying now for a relative pittance. It’s like knowing a late race at Hialeah is fixed so that a 30-to-1 horse will win. What does it matter how much you lose on the first six races when you know you are going to clean up on the seventh? These guys really know what they are doing, and they have the patience and confidence to wait out the pandemic even if it takes another four to six weeks for fears to subside. The rally they are planning will overshoot even the most insanely optimistic valuations, but don’t be greedy about where to exit. That’s because the top is apt to be fleeting, and the selloff that follows nearly as steep as the short squeeze. All bets are off if the virus is still killing thousands of people six weeks from now. But if the death toll tapers off when crocuses start to bloom and robins sing, be ready for the Mother of All Rebounds.
It feels odd to be characterizing Friday’s 2000-point rally in the Dow Industrials as “just noise,” but that’s what it was. It’s a safe bet that almost none of the buying was driven by optimism about how pandemic news would play out over the weekend. Who could predict such a thing? Uncertainty reins, and the only thing that seems certain at this point is that the normal flow of life and business in the U.S. and around the world will face more disruptions than anyone could have imagined even a week ago. We look to the news media to make sense of it all, but those who write about such world-shaking events as have occurred recently often seem as confused as the rest of us. On Friday afternoon, for instance, when the Dow Average closed with its biggest gain ever, most of it achieved in less than an hour, the Wall Street Journal headlined its digital front page with this unintentionally wacky mash-up: Stocks Soar as Trump Declares National Emergency. Linking these two events sounds preposterous, doesn’t it? The editors must have thought so too, since the headline was quickly changed to: Stocks Rise Sharply as Haywire Week Wraps Up. A Fatal Disease Haywire would be an understatement, for it was the craziest, most volatile week in stock-market history. That’s because machines are doing nearly all of the trading these days, and the algorithms that instruct them are programmed to detect and exploit the stock market’s every cough, sneeze, hiccup or belch before any living thing feels even a slight tremor. It was bad enough when short-covering humans with hair-trigger reflexes could cause stocks to soar for little or no reason. But when ten thousand thinking machines are set against each other to accomplish the same thing, except profitably, the predictable reaction is irrationality on an epic scale. The embarrassing thing — for civilization, that is — is that trillions of real dollars change hands when these melt-ups occur. It is plain to see that the markets are riddled with a fatal neurological disease for which there is no possible cure — other than, perhaps, getting reset by a bolt of lightning.
Financial advisors have been telling clients for years that they should just hang in there when the inevitable selloff came. It’s a safe bet that none of these guys ever uttered the words “bear market” to describe the supposedly healthy correction that eventually would arrive, since that would have spooked investors. Now the correction is upon us, if that’s all it is, but it is already unlike any before it: steeper, swifter and fraught with growing uncertainties about the economic effects of the pandemic. The S&Ps have plummeted nearly 30 percent in just three weeks, and there are no guarantees that an even worse stampede is not looming. The wisdom and steadfastness of advisors who are presently counseling clients to sit tight is certain to be tested in the weeks and months ahead, even if the global contagion grows no worse. The plunge has already been sufficiently punitive to cast doubt on any rallies that are coming. Many if not most investors will have resolved to sell into strength in hopes of recouping perhaps two-thirds of what they have lost. It is predictable that the upthrusts will never quite reach a satisfactory level and that investors, increasingly frustrated, will settle for less and less on the upslope of each new swoon. When the bear market finally bottoms 2-3 years from now, most nest eggs will have been reduced to a pittance. For their part, advisors will finally be gung-ho to sell everything. That’s how bear markets work. Always. If you are praying this isn’t one, take no comfort in the fact that you are in the majority.
Even the optimists are starting to understand that rallies are to be disbelieved and sold, not cheered. It’s one thing for the stock market to shrug off tariff wars, geopolitical tensions and impeachment hearings. But the pandemic poses a threat potentially even more grave, and there are simply too many uncertainties at the moment about how it will play out for stocks to stage a sustained rally. Will the U.S. escape a major outbreak, or will we instead live under economically crippling rules of quarantine like Italy? Still worse would be to have protocols similar to China’s imposed across the length and breadth of North America. It appears that China’s stringent containment measures are working and that the spread of coronavirus there is finally slowing down. If America is forced to take similar steps, we could be in for a long hot summer: no dining out, no concerts or ballgames, maybe even no backyard barbecues with neighbors. All of that seems a stretch at the moment, but no one can rule it out, least of all investors who are understandably eager for America to get back to business as usual.
With the Dow Industrials up a whopping 1167 points on Tuesday, we need to remind ourselves that the rally was a fraud, driven mainly by bears scrambling to meet margin calls. Indeed, the binge was impelled every inch of the way by short-covering. The saps who bought into it are certain to regret it — soon, and in a big way. Mr. Market always makes sure of that. His purpose is to make it extremely difficult for bears to rack up a big score even though the collapse they’ve patiently awaited for years is finally happening. The flip side of Mr. Market’s cruel plan is to trick bulls into staying fully invested the whole way down. What fools! But we would be foolish ourselves to underestimate the power of short-covering rallies, especially if stocks have actually entered a major bear market. For it is our doubts and skepticism that will fuel the rallies, along with a persistent failure to imagine how far they can go. How do we compensate for this in order to avoid getting trampled in the next buying stampede? For starters, by accepting that the surge will not end until those of us who have experienced enough bear markets to know how very devious the countertrend moves can be are convinced that “this one is for real.” When even hardened skeptics have thrown in the towel, that’s when the market will be ready to turn south again with a vengeance. No Great Trick Since few of us doubters will have the guts to go against the churning in our stomachs at the crucial inflection point, I’m going to suggest an easier way: follow Apple shares. Do this with discipline and diligence and you cannot go wrong or be fooled. AAPL is the best proxy we have for the institutional mindset that still rules the markets, and the stock will move with the kind of bold certitude necessary to lead every spurious charge. Get AAPL right, and you will get the market right. This has been no great trick during the bull market, and as the dot-com crash and the financial collapse 0f 2007-08 taught us, it will be no more difficult in a bear market. Stay closely tuned if you prefer trend calls without errors.
I appeared to occupy a unique place on the lunatic fringe when, many years ago, I started writing about the prospect of a short squeeze on the dollar. When I bounced this idea off a half-dozen finance professors, each had the same response: “Huh?” Their incredulity notwithstanding, it has always seemed a given to me that it would take a catastrophic deflation to wipe out debts, both public and private, that long ago exceeded our ability to repay them. The main feature of a debt deflation is an increase in the real burden of debt. Ultimately, and unfortunately for all who are fully invested in the politically popular idea of a free lunch, every penny of every debt must be paid — if not by the borrower, then by the lender. We kid ourselves to think we will escape it via hyperinflation. Realize that the biggest piece of what Americans owe, putting aside incalculable future liabilities from Social Security and Medicare, is mortgage debt. It is not simply going to go away, and that is why deflation, rather than hyperinflation, is far more likely to determine the financial endgame. This premise starts with the assumption that mortgage lenders will never accept a few hundred-thousand-dollar bills peeled from our hyperinflated wallets to settle up. Instead, most mortgages will eventually have to be rewritten as lease agreements so that people can stay in their homes during the hard times that are coming. This process is already well under way via a rental boom that has drastically altered the dynamic of the housing market. Private equity firms have not only been buying up whole neighborhoods at inflated prices in order to rent homes to those who cannot afford them, they have been building news homes to lease to the same tapped out crowd. ‘Minsky Moment’ Delayed But the mortgage market is just nickel-and-dime stuff compared to the global derivatives market. This quadrillion dollar shell game is denominated almost entirely in dollars. Those on the borrowing side of the equation have avoided a Minsky moment because the central banks have been infinitely accommodating. This crackpot scheme cannot possibly last, however, and the reason is become increasingly obvious: Monetary stimulus is not generating enough growth to pay off loans even at zero percent or less. The world is caught in a deflationary vise, and it is about to tighten because of the economic effects of the coronavirus. It is the precipitous drop in the price of crude oil that most threatens the financial Ponzi scheme. Energy resources were the main source of collateral for the game when the world emerged from the mortgage-securities collapse of 2007-08. “What tangible asset can we hock up to our eyeballs this time?” asked the financiers. Their answer was crude oil, and now the enormous bet they made on the energy patch has started to implode. Even before the pandemic hit, fracking had glutted the world with quantities of natural gas and oil that OPEC and the Russians could not counteract even with drastic cuts in output. With the pandemic bearing down on global growth, there is no way to avert the liquidity-trap created by the implosion of hyper-leveraged energy resources. [Editor’s note: In a timely coincidence, crude oil plunged $13 overnight to a low at 28.57. The June contract has since bounced to 34.65, but I expect a relapse to exactly 25.88 before it’s over. RA] Money Velocity Is Key Another big problem for the central banks, and for anyone counting on easing to pump up the stock market, concerns money velocity. Realize that stimulus implies borrowing. Interest rates can fall to zero or even lower, but the money made available in theory has to be borrowed into existence before it can stimulate anything. The scheme works when everyone is confident that asset values will keep rising, as they very predictably have been doing for more than a decade. But the pandemic has knocked investors’ certitude about this for a loop, killing money velocity and with it the multiplier effect that causes economies to appear to boom. The recent, unprecedented explosion in bond prices and the inverse collapse of yields remind us that another term for money velocity is liquidity preference. When stocks were rising relentlessly, there was little concern about liquidity because stocks themselves were quite liquid. Baby Boomers and other savers had come to regard the Apple shares sitting in their nest-egg accounts as the same as cash. Not any longer. In fact, the opposite will be true as AAPL and other portfolio mainstays continue to fall. “Liquidity is a coward,” I wrote here recently (quoting Ray Devoe), and it evaporates at the first sign of fear. Post-Bubble Reality Which brings us back to the dollar and the prospect of a short squeeze in which borrowers will be hard-pressed to come up with cash when short-term rollovers start to seize up. Here’s my colleague Bob Hoye on what to expect: “We will stay with our old observation that the senior currency becomes chronically strong in a post-bubble contraction. And after building a base for a few weeks at this level there could be another rally. To better understand this it should be understood that with most prices deflating in a post-bubble contraction the senior central bank will not able to depreciate its currency. The senior currency is still the U.S. dollar. Another way of looking at it is that service debt due in U.S. dollars represents a massive short position in U.S. dollars. And a central bank that can’t depreciate its own currency is like a pub with no beer.” Just so. Anyone banking on the Federal Reserve to come through for the economy and stock-market bulls is in for a rude surprise. _______ UPDATE (Mar 9, 9:02 p.m.) So now Wall Street is banking on the Fed to ease two more times in quick succession to bring administered rates down to near-zero. ZIRP has worked so well for Europe that it’s a wonder the feather merchants haven’t already granted Wall Street its wish, like, yesterday. Don’t put it past investors to pretend for a while that it will work, or for the hacks who invent the news each day to start talking up the coming housing boom.
Who could have guessed Wall Street would go crazy over Joe Biden? Stocks staged an epic rally on Wednesday after the 77-year-old comeback kid resurrected his campaign in Super Tuesday balloting. Biden’s success did what the Fed’s 50-basis-point rate cut earlier in the day had failed to do — i.e., rally the stock market. Now, presumably, all Biden has to do to leave Trump choking on dust in the polls is say he’s always been a strong advocate of easy credit. Perhaps the guy can cure coronavirus, too? We await word on this from Biden himself, since he has never been shy about taking credit for…everything. In truth, it was not bumbling, quid-pro-quo Joe’s victory the markets were celebrating, but rather the drubbing that Bernie suffered. Although the Marxist lunatic is still very much in the race, Tuesday’s results quelled fears that he will run away with the nomination. Biden now has more than a fighting chance, and his candidacy could pick up steam if he floats Hillary as a possible VP choice. That could make lemonade from the lemon-like fear that he could sink into full-blown dementia before 2024. The good news for the Republicans is that a Biden/Clinton ticket would put two world-class liars at the top of the ballot in November. Both of them are certified, graft-grubbing weasels who made every dime of their wealth by selling access. Under the circumstances, perhaps the press might have to go a little easier on Trump and the source of his money. Yeah, sure. Positioning Biden’s Marbles Fox News has been pushing the notion that Biden has lost his marbles and that voters have picked up on this. Democrats needn’t worry, since we can expect Joe’s fawning supporters in the press either not to notice, or to profess to be charmed by his tendency to forget where he is, who is interviewing him, and even his wife’s name. Biden’s strong showing was deemed a shocker by the news media, but when was the last time these morons got anything right? None of them, least of all the experts who clutter the op-ed pages with pseudo-scientific election-map bilge, had expected it to become a two-man race so soon. In retrospect, who actually could have believed that a commie, a fake Cherokee or a Jewish New York billionaire would take any votes away from Biden in the Deep South, where he laid claim on Tuesday to an impressive swath of the map? Now the press will go all-out pretending sleepy Joe’s revival is the Second Coming. Bernie will get kicked around worse than Richard Nixon, and Trump will get seriously funny whenever Biden is the subject. Oh, and other than on Fox, we will not be hearing much about, ahem, Ukraine. _______ UPDATE (Mar 5, 2:50 p.m. EST): In the category ‘stupidest headline of 2020’, this Wall Street Journal topper takes the prize: Stocks Extend Drop as Anxiety About Virus Returns. When will they figure out that the stock market’s ups and downs drive the news rather than the other way around. If the Dow hadn’t gotten shellacked on Thursday and instead had risen, we’d be reading the same, upbeat coronavirus headlines that blanketed the news on Wednesday, when, supposedly, contagion and the death toll were receding in China and elsewhere. Do the halfwits who concoct these stories actually believe that a single case of coronavirus that turned up on a Princess cruise ship has caused our supposed ‘fears’ to careen back to end-of-the-world dread? So it would seem.
In the latest update to the Rick’s Picks home page, I’ve revised an interest rate forecast for the 30-year bond to — better sit down for this — 0.73%. This is an implied recession/depression away from the current 1.60%, so you may want to jot the new number down. I got a wake-up call on this from my friend Doug Behnfield, whose name will be familiar to anyone who has followed Rick’s Picks for a while. Doug, a Boulder-based financial advisor at Morgan Stanley, is not only the smartest investor I know, he is one of the smartest guys. He’s been loaded to the gills with muni bonds, among other investables, and is having the kind of year with them that even Soros or Buffett would envy. Doug called this afternoon to ask about the 1.58% interest rate target I’d proffered a while ago for the 30-Year T-Bond. I had thought this number would correspond to a still unachieved 186^04 target in the futures contract, but I was way off. This discrepancy aside, how confident am I that long-term rates will fall to 0.73%? Very. Drop by the Rick’s Picks Trading Room sometime if you’re curious about how often these high-confidence predictions hit the bullseye. Here’s a link to a free two-week trial that doesn’t require a credit card. Liquidity Is a Coward If long-term rates are in fact headed well below 1%, it would imply that a deep economic slump is coming. As for stocks, Doug thinks the eager buyers that have powered the bull market for 11 years are about to vanish from the scene. ‘Liquidity is a coward’, he notes, recalling an observation frequently tied to Ray Devoe. A article on the subject at Nasdaq.com explains: “Money will flow to where it is best treated. If the markets should be declining, then the potential buyers can step aside, allowing the markets to fall into a vacuum created by their absence. This process becomes self-actualizing as lower prices generate margin calls, which begets forced selling, more impatient (and frightened) sellers, and ever-lower prices.” Just so. For Baby Boomers in particular, this could pose a serious problem. They have 75% of their liquid net worth in S&P 500 stocks, notes Doug, and the robust liquidity that rising markets have provided has gotten them used to treating their stock portfolios like cash. They could be in for a rude awakening if they have to raise money in a hurry by selling, say, Apple shares when they are falling. Doug thinks the S&Ps could come down as hard as Nasdaq stocks did when the dot-com bubble burst in 2001. If this happens, he says, financial advisors will be ruinously telling their Baby Boomer clients to sit tight. For now though, he says, ‘complacency is unbelievable.’
Nothing like a little QE chatter to trigger a buying rampage on Wall Street. Powered by freaked-out bears getting hit increasingly with margin calls as the day wore on, Monday’s short-squeeze panic drove the biggest one-day gain in stock market history. Don’t fight the Fed, as the saying goes, and today’s record-breaker reminded us why. Although a deep global recession appears inevitable, we’d be the last to get in the way of this stampede. And not until the last, foolhardy bear has been gutted and disemboweled will we suggest sallying forth to bet cautiously against the banksters. For the moment, however, the ‘easing’ chorus has grown so shrill over the last few days that the central bank is all but certain to accommodate with a quick 50-basis-point drop in administered rates. However, never before has the idea of stimulus been stripped so bare of the pretense that it will help the broad economy. It will help inflate assets, is all, so that the resulting glut of funny money can float everyone’s boat — perhaps even the working man’s paycheck. Or so the theory goes. But it’s a stretch to think the stock market can recover to new record highs as it has done reliably for more than a decade, or even merely tread water, just because the central bank is about to shave 50 basis points from the federal funds rate. Shares would need to stay afloat in the face of a steep earnings downturn that could stretch into autumn and the holiday season. Some of the biggest companies in the world have already warned that revenues will take a big hit from the pandemic. ‘Radioactive’ Chinese Will the stock market be so feisty when Americans trying to avoid contagion shun restaurants, concerts and movie theaters, as well as airplanes, cruise ships, buses, subways and trains? Will global commerce be able to even grind along in an environment where Asian businessmen are already being treated as though they were radioactive? Will shares be able to mark time for at least a few more bad quarters until the coronavirus subsides and global supply chains return to normal? These are important questions that Wall Street chose to put aside for now. However, investors should have no illusions that short-covering rallies, spectacular though they may be, will alter the course of a pandemic that has only just begun to bear down on the global economy.