Dead cat bounce, noun, definition; a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions.
Imagine if stock prices decoupled from the real economy and steadily rose on the back of central bank policy. Imagine if a decade of historic low rates, perennially-optimistic forward guidance and trillions of dollars in bond purchases triggered the longest rally in Wall Street history. Imagine if investors shrugged off bad news, (flagging GDP, poor earnings reports, shrinking capital investment, over-stretched PEs, and the slowest, most anemic recovery in the post WW2 era) and continued to bid stocks higher pushing prices to the moon. Can you imagine that?
Now try to imagine what would happen if investors suddenly lost confidence in the Central Bank’s ability to prevent a correction, to turn bad news into a “buying opportunity”, or to pump liquidity-heroin directly into the financial system. Imagine if a situation arose in which the Fed’s meddling had no impact on markets or stock prices. Imagine if the Fed became irrelevant because it didn’t have the tools required to fix the problem or if liquidity and easy money had no material effect on stock prices. Finally, imagine if stock prices suddenly reconnected to the real economy after a decade of stock (buyback) manipulation, debt-fueled levitating, and the lavish interventions of an activist Fed. What do you think the outcome would be?
Dow Jones Moonshot: The DJIA’s biggest point gain in history
On Monday, all three major stock indices skyrocketed higher on news that global central banks would aggressively lower interest rates in response to the economic damage from the coronavirus pandemic. The benchmark Dow Jones Industrials were up more than 5% or 1,293 points, the biggest point gain in history. It’s worth noting, that the gains were not a reaction to the relentlessly bad news concerning supply line disruptions, falling GDP, lower corporate earnings or the steady uptick in virus outbreaks in countries around the world. No, stocks soared for one reason alone, the promise of more market interventions and meddling by the world’s central banks.
It seems strangely fitting that after 10 years of nearly-nonstop manipulation, CB’s would launch one last explosive salvo before before the cannons fall silent and stocks reconnect to underlying fundamentals. It could be that Monday will be remembered as the twilight of the Central Banks, a “last Hurrah” before investors return to the “old normal” where prices were determined by basic supply-demand dynamics and not by a well-oiled printing press that showers Wall Street with cash whenever there is even the slightest sign of distress. The astonishingly strong reaction by investors illustrates the profound effect that 10 years of Pavlovian conditioning has had on investors who still cling to the idea the easy money and clumsy intrusions into the market by agenda-driven bankers can overcome any problem and put stocks on a permanent upward trajectory. In the weeks ahead, coronavirus will test that theory proving that the Fed is not all-powerful force many had believed.
There should be some attempt to put today’s stock market surge into perspective. First, the economy is not improving, it is deteriorating due to supply-chain issues brought on by the coronavirus. Income, personal consumption, GDP, manufacturing, trade, durable goods, bank loans, business investment, air freight, rail traffic, oil, stock buybacks, container shipments, and corporate profits will all be down in 2020 due in large part to the highly-contagious virus and its impact on critical supplies from China. Consumer sentiment and housing have remained surprisingly strong, but as the effects of the virus are more widely appreciated, these will be the next shoes to drop. There is no sector of the economy that won’t be affected by the virus.
More importantly, the Fed does not have the tools to fix the problem. Market analyst Peter Boockvar summed it up on a segment on CNBC today. He said:
“A rate cut is not a vaccine. It will not help supply issues in China and it won’t help to get people back on a plane or get back into a casino. It’s not an antidote for what ails us right now. What the antidote is, is a plateauing of this spread. (of coronavirus) That’s the answer to this, not some wasted rate cuts….that won’t help economic growth….Central banks are shooting blanks ” (See the entire video here) Peter Boockvar central banks are shooting blanks
Bingo. Rate cuts won’t help, because they are designed to entice people and businesses into spending money. But the problem isn’t on the spending side, the problem is on the supply side. You cannot buy a laptop computer if the components for that computer are sitting on a conveyor belt in Hunan province. That’s the problem. Cheaper money can’t fix that. Pavlovian investors have not yet absorbed that fact, but their great awakening is not far off.
Over and over, analysts keep reiterating the same mantra, “The Fed can’t fix this”, but brainwashed investors keep shrugging off the advice. Why?
Here’s what former Pimco executive Paul McCulley said today on CNBC:
“This (coronavirus) is unambiguously a real shock to the economy. This is not like 2008, which was a made-on-Wall Street shock. The important thing to understand is that the Fed can’t fix this problem.” We hear the same from Komal Sri Kumar, president of Sri-Kumar Global Strategies who said, “The Fed has no role to play here. So to the extent that it reacts at all, it is irrelevant. It shouldn’t be happening.” TV personality and investment guru, Jim Cramer, offered this, “Unless the Fed can create a vaccine or beat the virus, then it really doesn’t matter,” while former investment banker Christopher Whalen, founder of Whalen Global Advisors, said much the same but added this sarcastic quip, “The market’s like a 2-month-old child. Every time it cries, it wants to be picked up. Sometimes you’ve got to leave the baby in the crib.”
The analysts at CNN provided a longer explanation, but their basic conclusion didn’t veer too far from the others. Take a look:
“Questions remain about how much policymakers can really do to mitigate the coronavirus shock to the economy and markets — raising the possibility that any stabilization in risky assets will be short-lived.
“While we expect the policy cavalry to arrive soon, central bank easing may have a more limited ability to address this type of real economic shock,” Zach Pandl and Kamakshya Trivedi of Goldman Sachs told clients on Sunday.
Put another way by Hussein Sayed, chief market strategist at FXTM, a currency broker: Even if the Fed cut interest rates to zero, the European Central Bank pushed interest rates further into negative territory and the Bank of Japan stepped up monetary stimulus, it would do little to restore public confidence. The problem isn’t access to cheap money, but the growing health crisis.”
“Will these measures encourage you to buy a new [apartment], a new car or even a new iPhone? … Are you likely to consider expanding your business given the cheap liquidity? Most likely, the answer is no,” he said Monday.
Central banks also have far less ammunition to deploy than they did a decade ago…. The ECB and BOJ might have to get creative — an experiment that would unfold in real time.” (“Central banks aren’t the answer to coronavirus fears”, CNN)
Indeed, Central banks WILL get more creative, in fact, the Bank of Japan already has in a big way. On Monday, “the BOJ unleashed a stock market intervention and bought a record amount of Japanese stock ETFs …. According to Reuters, on top of its small daily purchase of ETFs targeted to “encourage companies’ capital spending”, the BOJ bought 100.2 billion yen (\$926 million) of ETFs.” Keep in mind, “the BOJ already owns nearly 80% of the country’s stock of ETFs, the result of a program begun in 2010 and ramped up in 2013.”(“Bank Of Japan Buys Record 101 Billion Yen In ETFs To Stabilize Markets”, Zero Hedge)
Wow. By the way, according to John Hancock Investments, “An ETF is an exchange-traded fund, is a basket of securities that trades on an exchange, much like a stock. ETFs are generally highly transparent—their underlying holdings are fully disclosed on a daily basis—and are highly liquid.”
So, the BOJ, which is the petris dish for the Fed’s lunatic ideas on monetary easing, is essentially loading up on stocks, artificially goosing their prices higher, and creating conditions for a system-wide meltdown. Just don’t call it “manipulation”, okay?
So why Central Bank policy going to fail?
Two reasons. The first relates to the fact that the economic crisis will continue to overpower the financial markets pushing stocks down to a level where they will reconnect with fundamentals. The Fed is not going to win this tug of war, not this time.
Second, there is nothing that can prevent the stock slide from continuing because it reflects the prevailing sense of uncertainty that has gripped investors. An article on British economist John Maynard Keynes helps to explain the pernicious effects of “irreducible uncertainty (that) lies behind panics and bouts of exuberance and primarily accounts for the instability of market economies….Keynesianism is..essentially about uncertainty and how it leads to economic instability.” Here’s a short excerpt from an article on Keynes in a 2008 edition of the New York Times. It’s worth a look:
“The basic question Keynes asked was: How do rational people behave under conditions of uncertainty? The answer he gave was profound and extends far beyond economics. People fall back on “conventions,” which give them the assurance that they are doing the right thing. The chief of these are the assumptions that the future will be like the past … and that current prices correctly sum up “future prospects.” Above all, we run with the crowd….
But any view of the future based on what Keynes called “so flimsy a foundation” is liable to “sudden and violent changes” when the news changes. Investors do not process new information efficiently because they don’t know which information is relevant. Conventional behavior easily turns into herd behavior. Financial markets are punctuated by alternating currents of euphoria and panic.
Keynes emphasized (money’s) role as a “store of value.” Why, he asked, should anyone outside a lunatic asylum wish to “hold” money? The answer he gave was that “holding” money was a way of postponing transactions. The “desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.”…
(“The Remedist”, Robert Skidelsy, New York Times, 2008)
This is why stocks will continue to fall regardless of what central banks do. The coronavirus is wreaking havoc on the global economy but, more importantly, its is deepening uncertainty about the future. Who knows how much damage the virus will inflict, who knows when the contagion will pass, and who knows if-and-when there will be a cure? The steady drip, drip, drip of bad news is bound to weigh heavily on investors dampening their view of the markets, undermining their confidence in the Fed, and intensifying their desire to hold money to ease their own disquietude. It’s all about uncertainty. Keynes knew what he was talking about.