Risk sentiment was noticeably sour Wednesday morning in the US, as market participants pondered earnings, vaccine rollout, the future of Joe Biden’s stimulus plan, and what looked like it might be the beginning of a waterfall effect from the ongoing efforts of the Reddit crowd to engineer short squeezes and otherwise triumph in what some have framed as a kind of “populist” uprising against the “suits.”
The dollar trekked higher as equity futures sank, and 10-year yields fell again — a move back below 1% looked imminent prior to the Fed and Jerome Powell’s first post-meeting presser of 2021.
“Powell’s challenge [is] providing assurance the Fed remains in a position to act if needed, while simultaneously reassuring the market the outlook is developing in a way resilient enough not to warrant additional policy support at this time,” BMO’s Ian Lyngen said, calling that “a delicate balance to be sure, especially given the recent pullback from the local yield peaks as the harsh realities of Washington politics indicate it will be a long and winding road to fiscal bailout 3.0.”
This is always the tightrope walk for monetary policy — how to convey that accommodation is still necessary and that more can surely be done, while at the same time suggesting things are going fine. Powell is not the best communicator, although last year’s trial by fire certainly helped hone his skillset in that regard.
When it comes to “fiscal bailout 3.0,” Chuck Schumer indicated he may venture down the Democrat-only road if Republicans won’t cooperate. “On our caucus call today I informed senators to be prepared that a vote on a budget resolution could come as early as next week,” Schumer said Tuesday. “We have to see what [Republicans] say in the next few days.”
There are two groups of bipartisan lawmakers attempting to come to some manner of compromise on the next round of stimulus. Invariably, the buzz word from both will be “targeted.” Biden is, of course, keen on reaching across the aisle, but is still seen as unlikely to back an approach that’s overtly piecemeal.
The US is moving to boost vaccine orders and supply, a welcome development as deaths continue to rise even as virus cases abate. “Not a single US state saw a significant increase in average daily cases over the past week, a departure from the winter surge that pushed the virus to new heights,” Bloomberg wrote Tuesday. “But death counts, the ultimate indicator of the pandemic’s impact, remain grim and are still climbing in some states,” the linked piece added.
In equity markets, there’s obviously no shortage of “bubble” talk — and here I mean that in a general sense, outside of the wild, wild world of Reddit-fueled manias.
“History is repeating itself again today [but] this is worse because Powell is the unwitting bad actor fueling the bubble,” JonesTrading’s Mike O’Rourke said, on the way to delivering a dour prediction. “It’s all plain as day,” he wrote, calling the market a “slow motion wreck,” and adding that,
We all see it happening, but due to cowardice, greed or ignorance, those in power refuse to act. This bubble will burst – they all do. When that happens, the decline in the equity market will create the significant disruption to the US and global economy that the Fed fears most. Powell will be dragged up to Capitol Hill just as Greenspan was. The legislative leaders who [called] Powell a hero and thank[ed] him for his service will attack him for the damage he has caused. Meanwhile, yet again, the American people will be left to deal with the painful fallout of the fourth, and likely worst, American bubble burst of the twenty-first century.
How’s that for a dark and stormy prognostication? There’s doubtlessly some truth to it, though.
However, I’d note that because history only “rhymes” (as opposed to repeating, verbatim) this time will be at least “different” on the details, if not on the overarching narrative. That narrative, when congealed and reduced to the least common denominator, just revolves around the notion that rampant liquidity provision and monetary largesse is inflating the price of financial assets, impairing price discovery, and driving investors out the risk curve and down the quality ladder.
In his note, O’Rourke cited a series of visuals depicting P/E ratios for a variety of indices, both on a trailing- and forward basis.
As I’m fond of reminding folks, there are a couple of ways that visual can “correct,” one of them is decidedly preferable to the other.
De-rating based solely on multiple compression in a scenario where, say, real yields rise or investors simply tire of paying ever more for a dollar of earnings, could be quite the painful experience. It’s also possible that earnings “catch up,” allowing unsustainable metrics to normalize in a benign way.
Admittedly, it gets more difficult to pen a happy ending with each passing week that brings some new manifestation of insanity. This week’s story was GameStop. Before that it was Bitcoin. Before that it was the late-summer tech bubble. Before that it was the mania in bankrupt stocks.
Whether it makes sense to blame one man — Powell — or one group of technocrats for all this is an open question.
I don’t have the answer. Maybe you do.