by Mark St.Cyr
Over the last five-plus years in regard to today’s financial markets, the most revered memes that are recited in unison whether it’s in the form of a silent prayer or, it’s done in a near backwoods revival fashion from the televised financial shows “pulpit” in a “Can I get an …. !!!” stylized homily are: “It’s different this time!” followed with “The Fed’s got you’re back.”
However, what they mean today may find those that put all their “faith” into such dogma finding that faith severely tested. For as of today July, 26, 2015 It truly is – different this time. And what else is different is: the Fed. may indeed have one’s back. Only problem this time is – that back may no longer be “yours.”
(Note: I’ve used the “you” and “yours” for ease of writing the conversation. It’s to be taken in the air quotes manner I’m trying to express. i.e., the general or population at large.)
Let’s view the “It’s different this time!” first as to show just how much it no longer may imply what so many have taken for granted since the initial collapse of the markets.
What’s different this time? Nothing less than the only thing which has both propelled as well as sustained the financial “markets” in an anemic (if not outright pathetic) economic recovery since the crash of ’08: Quantitative Easing aka QE. The difference? It was discontinued at the end of 2014. (Technically there is still a part or parts of it remaining such as the re-investment portions and/or other residuals from the program, but for all intents and purposes the direct inflow of near a TRILLION dollars annually (i.e., $80+ BILLION per month) ended in mid November 2014.)
Although it was only mere months ago (which to many feels like forever) some of those “differences” now seem too obvious to ignore even to the staunchest beholders of the faithful. Today, not only have the markets barely risen – some have turned negative for the year. e.g., The Dow™.
What’s been unnerving for many of the “true believers” is the fact of just how desperate the televangelist styled, next in rotation fund manager has been to accentuate the positive to hide behind the negatives. Many have been shouting, “The market is up over 1% today! Buy, buy, buy!” only to be followed either the next day or within a week “This 2% sell off shouldn’t cause any worry. This too shall pass.” Which it does, only to be followed by the same: again, and again, and again, and again. So much so many are wondering if what they’re watching is live or prerecorded reruns because the markets have gone virtually no where for nearly 8 months except for some unnerving gyrations within a range-bound level.
This is indeed different this time. Nearly 8 months with headlines and the near chanting in unison of “Best rally in years” and so forth and all that one has received for their faith as to “buy and hold for the long-term” is a negative Dow? How can this be? Easy: Welcome to what a house of cards market acts like when there’s not only a foul wind blowing, but also the shifting sands as the now infamous tide of liquidity continually vanishes much like the tide leaves the beaches baron before the first tsunami of havoc reaches the shore.
Suddenly everyone that was proclaiming “It’s a great time to be in stocks” are hedging their words as well as bets with warnings resembling “There are no free markets any longer, ” The markets are manipulated,” We see a bubble bursting of epic proportions on the horizon,” I’m afraid the markets will fall and not get back up this time,” and a whole lot more.
And these aren’t warnings coming from some poor lowly _____________(fill in the blank) analyst that’s usually brought on in a 1 to 100 ratio to provide the illusion today’s financial media shows both sides. No, warnings like these are coming from the heads of some of the largest hedge funds or activists on the planet. Many I would remind you dear reader professed, that people like myself “Have no idea what they’re talking about.” Now suddenly with no more QE – what we said to be true is unexpectedly a revelation in which they now concur and are professing the warnings to the world. Yes, it truly is – different this time.
Only this month many seemed confused as Apple™ went down and the market went up. Or Amazon™ went up and the markets went down. What is at the heart of this blasphemy one could hear across the ether? Easy. Welcome to High Frequency Trading (HFT) meets an anemic market starved of its former life blood (i.e., QE liquidity.) Where it now basically plays only in the largest single names of a particular index.
If the headline is interpreted as bad for the algo’s – Sell is the action. If the headline is interpreted as good – Buy is the action. All that matters is if there’s enough liquidity within the stocks buy and sell orders which they can front run to feed their parasitic coffers. What determines bad or good to the machines no one knows but for the programmers. However, what doesn’t matter is the stock, or company – just the liquidity that may surround it at any given time.
In other words the multitude of stocks within an index (say the S&P 500™ or DJIA™ to name just two) are basically meaningless to move or steady an index. Today, many an index is moved in its entirety solely by one single entity within it (Apple is prime example of this).
They only thing that matters now to the HFT players is: are there still enough people buying or have orders in any single stock that will need to be filled so that the machines can then front run them in a headline fueled, algorithmic, buy and sell stop hunt program as to skim their micro-cent payoff? Because one needs to remember – it takes a lot (an awful lot) of trades to make those fractions of a cent trades add up to the Billions of dollars in profits they’ve come accustomed to over the last six or seven years. And there has been no higher high hit in one of the major averages than one hit just this month as to show just how few players are left. Which only means there’s less and less “hosts” for these machines to feed on. So much for the “adding liquidity” argument in my opinion.
We’re currently in a market so good nobody wants to participate in it. Now that’s “different this time” no?
Yet let’s not forget that other meme recited with reverence and spiritual fervor: “The Fed’s got your back.” Well, maybe they do. However, is that “back” still yours?
Personally I find it near inconceivable that many don’t understand The Federal Reserve by its own actions has shown it cares not for anyone, or anything, except for its adherence to its models and/or assumptions. Whether or not “your” money at risk and could be wiped out with a single monetary policy decision near overnight is near lost on the great majority of today’s “investor” class.
I say this because of the glaring example that’s in front of everyone yet shunned and turned away from as if ignoring it means it never happened. e.g., “You” were a person who was prudent and saved your money for retirement in cash (or equivalent) savings and what has been brought to bear on your portfolio on this side of the financial market.
If this has been you, you know all too well: Not only have your interest bearing accounts been ravaged. You’ve also been penalized, scorned, and nearly shunned to some internment camp for the diseased. And if you think there’s no difference in size or that the “safe” side of investment spectrum is smaller as opposed the “risk” side. Lest I remind you the bond markets themselves let alone combined with the money markets dwarf the stock market. Yes, they’re even bigger than Apple for those wondering.
And the Fed. via its interventionism to save “the backs” of those in the stock market shoved a figurative pike into the backs of those that were both prudent risk takers as well as outright savers. And continued to twist the handle year, after year, after year, after year giving a whole different meaning to many a once “prudent portfolio” as they continue their current version of Operation Twist. (and yes – that is a real program as well as name instituted by the Fed.)
Today, Government bonds pay near zero. Savings on cash – even less. Have too much in savings and you may be told by one of the current “Too Big To Fail” banks to either get your money out of their bank and into stocks. Or, find another bank altogether. That is – if you can find one that won’t penalize you even more.
However, there seems to be an inevitable change coming on the wind. For that wind has been developing from the mouths of both the Fed. itself, as well as many of their closest watchers as well as confidants. i.e., “They’re going to raise rates and they’re not too concerned about an initial market tantrum.”
Yep, looks like the only “back” the Fed. is (and ever was) concerned with is the back they hope may display has “the spine” to actually follow through on what everyone knows should have started years ago. e.g., Getting off the Zero Bound. Even if that hike is minuscule (say 25 basis points) and is sooner rather than later (e.g., September as opposed to December) having some form of credibility (even if it’s only to their own inner circle) is far more relevant and more important to both the Fed, and the other Ivory Towers than it is to your portfolio. Regardless if you mean to retire today, tomorrow, or next year.
The only question a true believer of these latest memes should be contemplating is: Does this mean my portfolio passes into Limbo? Or will it now join the “savers” who’ve were banished to Purgatory these last years? Or, worse – another 2008/09 roller-coaster ride named “Hell on Earth?”
They may have shown they’ve had “your back” at every twist, turn, or gyrations of the markets over these last few years. However, one needs to remember “twists and turns” to save one’s “risk” portfolio has come at the pain and suffering from the opposing twists and turns in the backs of participants in what was once deemed “safe.” A market one needs to be reminded that’s far larger than the one “your” at risk portfolio may be currently vested in. And just look at how little sympathy was given to the holders of that market (e.g. bond holders and savers) again, which dwarfs the one “you” may be in.
You think they’ll care whether or not “your” index remains at these heights based on what has transpired in the other? Maybe one should contemplate that last line along with its implications a few more times and truly (and I do mean truly) think hard. But the contemplation shouldn’t stop there.
With Europe still well within the quagmire brought forward via the Greece tragedy, with political unrest smoldering in response to a bailout that not only is hard to swallow, but rather, is leaving a bad taste in the mouths of any political or monetary leader trying to defend it. The Euro Zone appears just one flare up removed from a full political as well as monetary wildfire. Anyone with a modicum of common sense can see the coming uproar that is near certain in regards to the current repayment structures being held by Italy, Spain, Portugal, Ireland, ___________(fill in the blank.)
The political infighting as well as revelations by the administrating monetary bodies as to the ability to pay, sustainability of the level of debt without forgiveness etc., etc. will not be lost on those who are in many ways beholden to the same types of structures as Greece was. Not only that, but far more important – seen just how their sovereignty was all but thrown away.
There are far too many countries, with far too many political activists, as well as leaders within those very countries that will not allow their nation to face the same consequences Greece has. They are only quiet as of this writing in my opinion because the dust has yet to settle. Yet, once it does the lessons learned will be shown by the next in line “debtor” when they inevitably will raise their voice and say: “Ah, yeah, that original deal we made…Yeah, that no longer works for us. We want to renegotiate the terms or we’re out – and we’re not bluffing.” And the Greece debacle will look like checkers as to the game of chess that will start in earnest sending the Euro Zone along with its markets into turmoil. As I said at the beginning: It sure is different this time.
But not too worry: “The Fed’s got your back” right? Because like all those other memes that meant so much to many a stock market next in rotation fund manager has said and “you” believed…
“China’s growth will help propel the markets out of this malaise.” “Greece doesn’t matter, it’s an isolated event.” “Earnings will be robust this quarter.” “HFT provides liquidity and honest price discovery” and a whole lot more.
But the one tag line that wasn’t a meme yet too me sums up what this market is about to go through with the wailing and gnashing of teeth looking for repentance for being so foolish in believing not only what promises they hoped to be true. Rather, what promises they prayed to be true. Only to find not only were they not, but the repentance for believing may be far greater than anyone ever contemplated, That line? (I’m paraphrasing)
“For $19 all your information on the Ashley Madison® website will be permanently deleted.”
If you’re a holder of any stocks and believed in either the memes or tag lines stated in any of the above. My suggestion would be for at least the next few months to not only sleep with one eye open, but making sure both your back as well as front has as much protection as humanly possible.