Global markets meandered Wednesday, as traders and investors took a step back to ponder the situation amid generally positive overall sentiment tied to the notion that as bad as today is on the public health front, tomorrow (where “tomorrow” mostly means 2021) will surely be better.
“The combination of a Treasury Secretary that markets believe will help economic recovery, a Fed that will underwrite the whole thing by allowing the economy to run hot and inflation to overshot before they tighten, and a handful of very promising COVID-19 vaccines set to arrive in weeks, has sent risk sentiment into overdrive,” SocGen’s Kit Juckes wrote. “We have seen big gains for all major equity indices, a 30% rise for crude oil prices, and the dollar is down against all major currencies, with the oil-sensitive NOK the leader.”
Around the world, stocks are up some 13% in November, poised to make this the best month in nearly 22 years.
That’s somewhat remarkable considering it comes as the western world plunges back into modified lockdowns to contain the virus, but, as ever, equities pull forward future outcomes.
“There are a couple of things that concern me at the moment. Retail flows are at immensely high levels as pajama traders continue to press the buy button relentlessly,” AxiCorp’s Stephen Innes said. “You get the impression that retail are once again piling back into the equity market almost as if there is no alternative.”
I suppose you can’t “blame” stocks for wanting to price-in the light at the end of the tunnel, even though it appears as little more than a faint glimmer, barely perceptible on some days given mounting caseloads, swelling hospitalizations, and rising death tolls. Global coronavirus deaths topped 1.4 million overnight.
Valuations in the US are through the roof — literally. The S&P’s price/sales ratio is well above the highs seen at the height of the dot-com bubble.
Wednesday’s pre-Thanksgiving session stateside promised a feast of ostensibly important data, and also the November Fed minutes. As usual, chances are most of it will come and go without moving markets in a material way, although the account of the Fed meeting does take on special significance in light of the recent spat with Treasury and the prospect of WAM extension at the December meeting.
Equities will probably be fine as long as there’s plenty of liquidity sloshing around. If the last dozen years have taught us anything it’s surely that.
Rabobank’s Michael Every lampooned Dow 30,000 in his daily missive Wednesday. The first “paragraph” reads as follows:
Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000! Dow 30,000!
That, Every wrote, “more or less captures the breadth and depth of financial market coverage of ‘key events’ of the past 24 hours.”
And you know, it’s funny, because there were around a half-dozen comments from random passersby that I didn’t approve on Tuesday because the would-be pundits didn’t seem to understand why the “milestone” is in fact not a milestone and thus didn’t appreciate the objectively asinine character of Donald Trump’s 60-second, no-questions-allowed press “event.”
Fortunately, Rabobank’s Every gets it.
“Clearly a US benchmark equity index passing into a whole new “DOW XX,XXX!” baseball-hat territory is worth mentioning. A little.” he joked. “Even President Trump, in-between court cases that still have what some election law experts describe as a ‘Hail Mary’ chance of prevailing, held an emergency press conference to announce the significance of the Dow development, which was very much in keeping with his equity-focused presidency.”
Remember, folks: Trump habitually insisted that you have to measure a president’s equity market “performance” from Election Day, not from inauguration day. He said that on too many occasions to count over the last three years.
If we apply that logic, Biden is riding the best global equity rally since 1988. Good times!
“So, 30,000. Wow. Who could ever have seen that coming at a time of infinite global central-bank liquidity?,” Rabo’s Every wondered.
All of this market optimism against an economic backdrop that is literally creating miles long lines at the food banks, makes me wonder when the reality check will come for traders. All of this unrelenting stimulus has us on a crash course with inflation if not hyperinflation and the “DOW 30,000” parties seem to be completely ignorant of what’s coming. Now I see the opinion pieces out there about how “this time it’s different” just like this time it’s different with bubble finance around FAAMG. But I have a hard time believing the laws of macroeconomics are suddenly changed because of no reason at all. If anything the fact that the Trillions in stimulus haven’t yet resulted in impactful inflation seems to me to be a major red flag. I suspect that the inflationary effects may be delayed because of the altered reality we live in during this pandemic. And because we are continuing to see unrelenting stimulus, that makes me wary of compounding inflationary effects when they finally do come to pass. That’s not to say that an effective vaccine that helps us to better control Covid-19 won’t be beneficial economically, but that doesn’t completely wipe out the impacts of this past years spending spree either. I just feel in my gut we have another major market selloff coming within the next 12 months, and I can’t shake that feeling.
It’s something.
The reality check might only consist of period air pockets and 10% corrections.
The big liquidity event was in March. There won’t be another event like that one soon. The issue now is insolvencies (and employment and income).
Honestly, it’s quite possible that any inflation will be driven by events not related to the easy money. If banks don’t lend it, the money is not going to get into the economy.
Onshoring, more UBI-lite, pricing power of the SMEs that do survive, and oil, could be enough. The granddaddy would be oil. Any up and to the right trend in oil sustained off the $40 mark is going to be YoY inflationary.
Let’s face it. We all want, or should want, a hot economy and a couple of years of 4.5% inflation going into 2022. Let the Fed-Treasury pour all the money into the deflationary hole they need to stave off the threat.
The monetary system is nearing a pivot to something else but it’s not there yet. More of the same in the meantime.
I mean the magnitude of the stimulus is dwarfed by the enormity of the crisis. Mortgages, rent, student loans, credit card interest, rising food costs, costs to shift to remote work and learning, along with unemployment have more than likely permanently swallowed up most of the stimulus never to be seen again. I really see little inflation risk without more massive and lasting stimulus targeting the bottom 90% of the population.
To worry about inflation at this level is like Gulliver worrying about his hair after waking up with LIlliputins lecturing him on his nose.
I’m not sure I see the correlation. I think a better depiction would be Gulliver worrying how the hell he’s going to get off the island while a Lilliputian is lecturing him on his nose. With the Lilliputian being the immediate risk and getting the frack off the island being the longer term one. I tend to be overly analytical, and I tend to view long term risks as being equally as important as near term. If you only focus on near term risks you are in fact setting yourself up for failure in the future. So you’ll have to excuse me if I am worried about the future of the global economy when the market is acting like not only are things “fine” but they are actually wonderful. That doesn’t align with reality and that’s unsustainable.
There are no “laws” of macroeconomics. It’s a soft science. There is nothing (nothing at all) that says trillions in stimulus “must” create inflation. Critics of stimulus have a hilarious habit of quoting economics textbooks when it comes to predicting hyperinflation, and then lampooning the same textbooks when it comes to anything else.
To paraphrase something from H’s recent writing: any science that observes or predicts human behavior is necessarily soft, because sentient actors tend to modify future behavior based on past outcomes of their own and others’ behavior. Human society (or any grouping of social animals) is a stochastic system.
It may be that inflation was well understood in a previous epoch, but the nature of currency, markets, capital and labor have been transformed broadly in the past 150 years, some of them multiple times, and they will be transformed again.
A theory of inflation that applies perfectly to USD of the present epoch would be a powerful thing indeed, but anyone who discovered such a theory would of course leverage it into non existence by trading on his knowledge and causing the actors in the system to modify their behavior in response.
Will Covid stimulus cause inflation when unemployment remains high. I suppose there is some scenario where it might, but I’m guessing it would be a very low probability. What would Stephanie Kelton say?
I’m sorry Xeger but I refuse to buy into the theory that somehow inflation just stops occurring. While I will concede that economics is a soft science, I don’t agree that it’s possible for supply and demand rules to stop applying, at least not perpetually. We have actually experienced just shy of 10% inflation since 2016 according to the US Bureau of Labor Statistics. Now it could be that the extremely cheap lending rates have sustained buying opportunities well beyond many consumers means, and that could explain the delayed effects of that inflation impacting spending habits and thus the markets. At some point though, lending on top of lending no longer has meaningful impact and I expect at that point we will experience some significant retraction. Unless we really expect a near future Fed to explore negative interest rates, which I think won’t happen.
Oh, inflation is still a thing! But its causes today may not be the same as in 1972, or 1938, or 1870.
I’m not an economist; I came to H’s site for the market tips and stayed for the macro and the politics. But, from what I can glean, inflation in a fiat-currency regime seems to correlate with the velocity of money/debt more than the amount of money/debt.
As the world’s reserve currency, there is a LOT of “frozen” USD out there locked up in sovereign reserves, insurance company holdings, private investment capital, and on and on. If that USD is staying on the sidelines then it isn’t inflating CPI asset prices.
A decade of near-to-zero interest rates, with inflation below target the whole time, ought to tell us something; don’t you think? Was financial capital being destroyed during that decade faster than it was created?
The consumer dollar just ain’t the same as the market dollar, is the murky and ill-formed hypothesis in the mind of this humble retail investor with no training and little experience…
cdameworth, your BLS datum is interesting; I will explore it. (It would invalidate this murky hypothesis of mine.)
And the key point on Stimulus = Inflation logic is that we have clear examples of the Two Phase recovery since 2008 and this stimulus was hardly sufficient to matter to the lower tier of society not privileged to have large investment accounts. If we print a quadrillion dollars and put it all into the bank accounts of billionaires… do we get inflation? I mean if you give a person who essentially has no ability to raise consumption any further more money how does it even theoretically affect the price of bacon?
Inflation only exists when the money supply expands within the population distribution which has pent up demand and that expansion is sufficient to overcome both debt repayment and savings desires. Additionally if there are not hard limitations on supply then inflation is also combated by further supply generation.
It’s easy to see trends in countries with hyperinflation and one thing that shows up regularly is that the internal production capacity and raw materials is negligible compared to demand. That’s how you get hyperinflation… not just because you print tons of money.
I’m not trying to be critical of stimulus, it has been an absolute necessity. What I am targeting is the inability of the current deployment structure’s inability to get stimulus to the economic parties that actually need it. How has throwing billions at rich mega corps worked out? They buy back shares, layoff employees, and give themselves bonuses. That’s ridiculously unethical when the intent of that stimulus was supposed to be to prop up the working class and ensure they remain funded.
Seems that we’re all arguing the same point, albeit from different angles. Birds of a feather!
Re the 30k on the Dow, I remember the salutations within the PM community when silver smashed the $10/oz barrier. Could score a decent happy hour martini for eight bucks at the time.
When silver broke through to the upside or when it came back down? (I was a spot silver dealer and eye-witness to both.)
If you have a Fed and a Treasury who will tolerate, indeed welcome, inflation in excess of 2%, does that not reduce the present threat of inflation to most institutional investors?
Your typical institutional investor has an investment horizon of a year or two. Hyperinflation or Japanification in the future is not too relevant to portfolio decisions, so long as that future is at least a couple years off. As long as inflation won’t cause interest rates to rise immediately, i.e. Fed will not relax yield intervention, said investor can focus on the “benefits” of rising prices.
As for the alarming corona-winter in store, markets discount the future, further out when uncertainty is low. If investors feel fairly confident about the outlook for 6-12 months from now, then they will position for that.
I think it is very probable that in the next 6-12 months, Covid will cease dominating the economy or headlines, due to the combination of vaccination and acquired immunity. The implications for certain business sectors are pretty tradable.
If some “recovery” names droped from $100 to $30 in March and are now up to $60, does that mean the trade is over? Wouldn’t you normally have backed up the proverbial truck at $60?
Sure, overbought and sentiment are significant risks here. Risks in the next few month timeframe are usually managed by hedging, sector allocation or position size. If you look under the hood of the typical institutional portfolio, it will probably show that managers are far from “all in” (e.g. look at 4Q holdings for active funds).
“Pajama traders” (think they) are quite risk-tolerant, especially if they are playing with house money, so it makes sense that retail traders are chasing with abandon.