It was a good week for US equities.
That’s actually an understatement. It was, in fact, the best week for US stocks since late August, when Donald Trump told reporters in France that “China called our top trade people last night and said ‘let’s get back to the table’”.
That phone call didn’t actually happen. Or if it did, China was oddly unaware of it. The truth was, Trump flew off the handle the previous Friday (August 23) after Beijing retaliated against the White House’s latest trade escalation and Jerome Powell failed to provide any cover during his speech in Jackson Hole. In an epic Twitter meltdown, Trump threatened to force US businesses to leave China. Stocks swooned. Hours later, he ratcheted tariffs even higher. The following Monday, he fabricated a story about a phone call with Chinese trade negotiators, setting the stage for a reconciliation with Beijing which culminated nearly five months later in the signing of the “Phase One” trade deal this week.
Suffice to say we’ve come a long – long – way from the dog days of summer, when an all-out trade war between the world’s two largest economies looked like a foregone conclusion.
The S&P set a record high for an eighth straight day Friday. So did the Nasdaq. It’s now been 70 sessions since the S&P fell 1% or more. Here are a couple of visuals from Bespoke out earlier this week:
(Bespoke)
Correlation doesn’t equal causation but the “conspiracy theorists” among you will note that over the same period, the liquidity spigots have been wide open.
Neel Kashkari doesn’t approve of that logic. “QE conspiracists can say this is all about balance sheet growth”, he tweeted Friday, before imploring the peanut gallery to “explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing”.
He shouldn’t waste his time. There’s no need to poll the audience. Especially not on Twitter. But Kashkari enjoys the banter, and God bless him for that. I’m not nearly as tolerant.
In any case, the fact is that it’s not “QE”. It’s really not. But it is liquidity. And that’s what counts. So the whole argument is a bit disingenuous on both sides.
Read more: What’s Behind The Rally? It’s The Liquidity, Stupid.
And besides, with global equities now sitting at record highs, up more than 32% from the December 2018 nadir, one is tempted to paraphrase Hillary Clinton from the Benghazi hearings.
That is: “Was it because of balance sheet expansion or because of some guys out for a walk one night who decided they’d go buy some stocks?! What difference at this point does it make?!”
BofA’s Michael Hartnett summed it up. [“We’re staying] irrationally bullish until peak positioning and peak liquidity incite a spike in bond yields and a 4-8% equity correction”.
Sure, we’re up 32% since the beginning of the year, but let’s not forget that we’re also up “just” 32 percent since Q1-17. It’s still a nice run, but pardon me if I’m not dancing because my “409k” has doubled.
Agree. It’s not QE. It’s worse. The BIS report and a deep-dive into Sept rate spike event makes clear the Fed was unwilling to let the market determine the value of lending an “overnight dollar.” BIS notes the four G-SIBs pulled back from the repo market, leaving hedge funds in trouble. Essentially, the Fed nationalized the repo market–w/o describing truthfully its activities–to save hedge funds from financial pain. As others have noted, now they’re stuck b/c they lack the guts to let the market shoot down a few hedge funds, banks, and equity prices. And the hedgies and the rest of know the Fed lacks the guts to step back. Enjoy the ride and the ridiculous narratives that attribute causation to something other than Fed-fueled liquidity, mainlined into traders’ computers.
Is it that complicated? What else is there to invest in for the common person to keep ahead of the real rate of inflation?
With yields nearly 2%, US Ts relative to other government bonds are much higher yielding. And their us simply too much liquidity in the system for yields to spike up. A 4-12% correction is likely in H1 without yields getting wacky.