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Dead Cat Bounce: Central Bank Easing Sends Stocks Into the Stratosphere
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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.

• Category: Economics • Tags: Coronavirus, Federal Reserve, Wall Street 
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  1. I am not sure, but I believe that Modern Monetary Theory contends that they can ease and ease again and again to their heart’s content. Since governments make (or create or manufacture, whatever) the money, they can make as much as they want. Up to the point of full employment, I guess.

    Don’t know if it’s true or whether I understand it. But quite diverting, ne?

  2. Biff says:

    I am not sure, but I believe that Modern Monetary Theory contends that they can ease and ease again and again to their heart’s content. Since governments make (or create or manufacture, whatever) the money, they can make as much as they want. Up to the point of full employment, I guess.

    I’m going to ‘sort of’ agree with this.

  3. Thomasina says:

    Modern Monetary Theory:

    “The basic argument made by the MMT “theorists” is that since “inflation is low and contained” we can simply “print” the money we want, spend it, and that’s constrained only by inflation, of which there is none of seriousness at present. …the claim of “low and and constrained inflation” over the last two decades is a lie.

    The cost of medical care has skyrocketed over the last 20 years. So has post-secondary education. So has actual housing expense; witness the housing market meltdown in 2008 and the resulting re-inflation of said bubble, which has done exactly nothing in terms of price compared with salaries.

    Ditto for a whole host of other mandatory spending. Property taxes in many jurisdictions have more than doubled in the last 20 years.

    Your salary hasn’t doubled over that period of time. In fact quite to the contrary.

    The number of households that pay more than half of their income in rent has skyrocketed in the last decade — it is up by about 50%. Clearly, they don’t think inflation is “low and controlled.”

    Of course there have always been poor people — here and everywhere else. But what’s happened over the last 30 or so years in this country is outrageous.

    At its core MMT is simply a means to steal more and faster. It’s entirely possible for the United States to run a budget surplus, as I’ve pointed out, simply by taking on the medical monopolists.”

    Go ahead, keep printing.

    Was that the idea all along? Purposely cause inflation, profit mightily off the inflation of assets (which has caused tremendous suffering to the poor), and then once things are almost beyond repair, cry out for free medical and the forgiveness of all educational debt, but only after you’ve banked your winnings?


    • Replies: @Barr
  4. @obwandiyag

    You’re essentially correct about MMT. MMT is about fiscal policy (ie government spending). What Mike discusses is monetary policy — ie the Fed & interest rates & liquidity injections (QE etc).
    Within the general constraints of supply — & supply IS the issue with the “virus” — the government does have the tools to mitigate some of the economic pain ahead.
    But, of course, the government doesnt much care for main street, (see the GFC) so expect fiscal tools to continue rusting….

  5. Bert says:

    The economic, monetary policy, and pandemic threats to stratospheric stock prices are all real. The only countervailing factor that I am aware of is the public employee pension funds’ quest for the high single-digit returns necessitated by inadequate government funding, which however will change sides as soon as a sell-off is deemed serious.

    From the point of view of technical analysis, the setup could not be more ominous long term. And today near NQ 9075 the dead cat may start falling again.

  6. Wilson says:

    Not sure how your conclusion fits, if the BOJ buys every stock for sale how can prices “meltdown”? The negative consequence is of course inflation and a declining standard of living for workers, people can’t afford families so no children are born, people can’t afford a better life or retirement so they kill themselves, maybe wages are worth so little that 3rd World migrants go back home to avoid starvation. But this cheapening of labor makes the rich extremely rich, and the decline is slow and manageable, so it is perfectly acceptable to the people who matter. Hard to say how it all ends, but it will take a least a few more generations, unsustainable does not mean impossible.

  7. onebornfree says: • Website

    “but, more importantly, its is deepening uncertainty about the future…….It’s all about uncertainty. “

    This just in: It’s Always Been About Uncertainty About The Future

    More accurately, its about uncertainty versus [wrongly perceived] certainty about the economic future.

    So right now, it appears that there are more people uncertain than certain about markets , hence the price swings, and hence the apparent flight to cash as a perceived “safe haven” [with US 30 year T-Bond yields continuing on down.]

    But the truth of the matter is that the economic future has always been uncertain, despite imagined “stability” and perceived “growth.

    The denial of the reality of the unpredictability of the economic future ,is what leads many to mistakenly “invest”/ save for a [what they believe to be] “certain” future of further growth in , for example , the stock market, and the belief that “just like the last time” central banks will be able to make everything “well”again. However:

    “No one can consistently and accurately predict “big picture” future economic events and scenarios. No investment “expert” advisor, no banker, no money manager, no economist, no politician, no computer algorithm, no fortune teller- not even you 🙂 [although any one of these, including yourself, might get it right on occasion, purely by chance”- Onebornfree.

    “The very idea that the future is predictable, that some formulas could be substituted for the specific understanding which is the essence of entrepreneurial activity, and that familiarity with these formulas could make it possible for anybody to take over the conduct of business is, of course, an outgrowth of the whole complex of fallacies and misconceptions which are at the bottom of present-day anticapitalistic policies.” Ludwig Von Mises- “Human Action- a Treatise On Economics” page 867

    “In fact both the economists and the businessmen are fully aware of the uncertainty of the future. The businessmen realize that the economists do not dispense any reliable information about things to come and that all that they provide is interpretation of statistical data referring to the past. For the capitalists and entrepreneurs the economists’ opinions about the future count only as questionable conjectures. They are skeptical and not easily fooled.”
    Ludwig Von Mises-“Human Action- a Treatise On Economics” page 868

    Regards, onebornfree

  8. A123 says:

    It is far from clear what is making the U.S. Markets move.

    Long term, Covid-19 is a plus. Showing the fragility of overseas supply chains will bring both resource extraction (e.g. rare earth elements) and manufacturing back to the U.S. Those jobs will boost the economy, and thus spending power, and thus further boost the economy in a virtuous cycle.

    Short term there will be significant pain in any activity that needs crowds. Any stock depending on packed theaters, concert halls, or stadiums is at risk.

    The big unknown is the auto sector. How long will it take them to make the necessary changes to de-globalize their supply chains? Given the number of suppliers involved, it is not nimble field.

    PEACE 😇

  9. @obwandiyag

    Since governments make (or create or manufacture, whatever) the money, they can make as much as they want.

    Money represents claims on the wealth of a society (nation, etc.), but only as long as it is credible to the members of a society. The US and other Western societies suffer from the delusion that they will always be legitimate in the eyes of their people, even if it requires the point of a gun to enforce it, and so they seriously think goosing the money supply is a viable option. We all know how that ends.

  10. TG says:

    “But,” asked Clinton-Grant, “why can’t we just buy some more ships? How much does an interstellar transport cost? A trillion dollars? I have sextillions in my accounts alone. I could buy a hundred ships, surely.”
    “No,” said Cheney. “We don’t have the capacity. All the money in the world won’t buy you a single ship.”
    “It’s like this,” said Draghi. “Suppose there are two apples, and you have a dollar, and I have a dollar. We each get an apple. But suppose that I print a million dollars. Now I can outbid you, and I get both apples. But I can’t get a million apples because they don’t exist. Our finances give us control, but they can’t make real things out of nothing. If Cheney says that we don’t have the physical ability to construct new ships in time, then we don’t. Period.”

    – From Splendid Apocalypse, Timothy J. Gawne, Ballacourage Books, 2015.

  11. Barr says:

    McDonald’s large cup of coffee now cost \$1.97 . 10 months ago it used to cost in same outlet \$1.67.

    The pundits on FOX business and CNBC don’t’ see any inflation. No surprise they agree with QE and rate cut .

  12. Wantoknow says:

    When everyone is again convinced that fundamentals matter the stock markets will fall. But note that the trend is to fix the price of all financial securities. The Japanese central bank is a case in point. If this is done thoroughly then all securities are a safe haven asset in times of real economic trouble.

    The holding of financial assets then becomes the same thing as holding money. Essentially all assets become money. This is an implication of pushing all interest rates to zero for return equals risk and the return on assets is zero. All financial assets are now viewed as safe assets and a premium must be paid to get investors, etc., to part with financial assets and purchase real assets.

    In Keynes-Hicksian terms the LM schedule expands to contain all financial assets. In a world of collapsing real asset values holding pegged financial assets is the preferred place to hold value. In this situation the surge into financial assets should continue as long as the real economy continues to fail and investors, speculators are confident that the central banks can peg financial asset values irrespective of the real economy. Notice recent Fed actions in the repo markets.

    Since, politics permitting, the central banks can issue all the credit needed to support financial asset prices there is no limit to the funds available to support financial asset prices. Only general institutional collapse (government collapse) is likely to remove central bank credibility in this matter.

    Since the current political order equates rising stock markets with political legitimacy, good order and most importantly the financial health of each regime’s donors and supporters of consequence one must expect all effort will be expended to support such markets. Financial and political collapse will become identical.

    Unless one can confidently predict political collapse is imminent in the West the current volatility in financial markets should calm soon and stock prices resume their rise. Do not expect rationality in investment pricing to return without a fundamental reconsideration of the political order.

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