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‘Is This The End Of The Central Bank Put’?

It may be time to question your religion.

One day, someone will write a tragicomedy about the BTFD meme and whoever that person is should definitely include something about how the the dip-buyers never fully understood to what they owed their good fortune.

The greatest trick central banks pulled over the last two years is creating the conditions that allowed the CB “put” to run on autopilot. Thanks to years of transparency and telegraphing of the telegraphing (call it “forward guidance squared”), they gradually obviated the need for even verbal intervention during fleeting periods of market turmoil.

After a while, market participants became so accustomed to accommodation that they began to effectively front-run central bank soothsaying and before too long, those same market participants began to front-run their own front-running. “If we know dovish forward guidance is coming, why wait on it to buy the dip?” became “If I know the next guy is not going to wait on dovish forward guidance to buy the dip, then I better buy the dip faster than he buys the dip” became “If I know the next guy is not going to wait on the next guy who is himself not going to wait on dovish forward guidance, then why wait on either of those two guys?” Here’s what that looks like visually:

btfd

(BofAML)

Ultimately, that recursive exercise led to people buying dips before the dips even happened or, in other words, just plain old buying, dip or no dip.

Of course most market participants have either lost track of this or else never fully understood it in the first place, which means that when the dynamic starts to reverse (starting with the people who do understand the importance of the CB “put” not showing up to the party once it becomes clear that no dovish soothsaying is forthcoming), a lot of the “dumb” money like that which poured in last month will be at a loss when it comes to explaining what happened.

As we noted on Monday, E*Trade added 64,581 gross new brokerage accounts in January, the most for a single month since September of 2016:

ETrade

If you think the majority of those people have any conception whatsoever of why it is that stocks got to where they were when that buying was taking place, I’ve got an infrastructure plan complete with a bridge to sell you. Here’s some fun anecdotal evidence from Tuesday:

Over the past two weeks, there hasn’t been much in the way of evidence to support the contention that central banks are as yet prepared to step in here. Additionally, we’re coming into this with a rookie Fed chair.

“While Jay Powell’s credentials are strong, the market has yet to assess his ability to guide policy,” BofAML wrote on Monday, adding that “unlike for Bernanke or Yellen, the market cannot go back to Powell’s academic writings to infer his thinking in a broad range of crucial economic topics.” This uncertainty, the bank suggests, is partially responsible for “risk assets being on a fire sale.”

Kuroda looks like he’s going to get another term and all else equal, that should be a boon for risk assets – on Tuesday, a Japanese lawmaker effectively put up the Pan signal, asking the BoJ’s jovial head about recent market events. His response:

But so far, news of Kuroda’s impending reappointment hasn’t been enough to put the brakes on a yen rally which has pushed USDJPY to its lowest since the U.S. election, after falling below 108 for the first time since September on Tuesday:

USDJPY

To be sure, any further turmoil in global markets would put the central bank “put” (and implicitly, the viability of the BTFD regime) to one of its most daunting tests since the crisis. Not having, as Bernanke would put it, “the courage to act”, would risk sitting idly by as conditions deteriorate. But “acting” (whatever that might mean) would delay the process by which policymakers rebuild their ammo ahead of the next downturn. The last thing they want is to be still stuck in NIRP/ZIRP and saddled with enormous balance sheets when the shit hits the fan in earnest because then what do you do?

In any event, Goldman is out with yet another postmortem on the past two weeks and the title speaks for itself:

end

“Recent central bank comments suggest the ‘central bank put’ currently may be more out of the money than markets previously thought as the macro backdrop is strong and financial conditions remain easy,” Goldman writes.

You’re reminded that last Friday, the bank’s co-head of global equities trading Brian Levine said this in a letter to large clients: “… longer-term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips.”

“Central bank officials so far view [these] events as a healthy correction,” UBS wrote late last week, adding that “equities will have to suffer much larger losses over an extended period before there is any concern.”

Connect the dots.

BTFD is only a viable “strategy” if the central bank “put” remains in place or, more colloquially, if the punch bowl is still spiked…

[Disclaimer: for illustrative purposes only. The following visual is not meant to conjure images of Kuroda in drag pouring rum into an actual punch bowl]

punch

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