VRA Update: Extreme Overbought Meets J Powell. The Chart That Matters Most to the Fed Also Guarantees Much More QE.
/Good Friday morning all.
Yesterdays 1800 point loss in the Dow is being met with +600 point gains in futures. I’ll be surprised if these gains hold. After a 48% 2-month move higher and then yesterdays -7% drop and the “hideous” internals (among the worst in history, with just 1 S&P 500 stock higher on the day), it’s doubtful that yesterdays move lower was a one-off. Watching oil, tech/semis, internals and smart money hour (and we prefer not to buy on Fridays, much less Fridays that open +600). We are very skeptical of experts (Fauci) claiming that a second CV wave could hit us hard. We are not concerned about the markets for this reason…only that the markets have hit extreme OB…purely technical reasons. Fire Fauci today. Then audit his personal finances.
If you watched Fed Chair J Powell Wednesday (we do it for you so you don’t have to) you saw a man that appears entirely committed to saving the economy. And of course, therein lies the problem…the global economy is now fully dependent on central banks as the buyer of first and last resort…led by Powell’s Federal Reserve. This is our new normal. Has been since the onset of ’08 crisis.
Powell has a long history of fumbling these monthly Q&A’s. Tyler’s research shows that the markets fall roughly 90% of the time after he begins taking questions. This presser followed the same script, with the Dow finishing just off of its lows of the day on Wednesday(-282), and then the big 1,800 point collapse yesterday. But the Nasdaq, on the heels of Apple’s +2.6% move higher, took both Apple and Nasdaq to new ATH.
And of course, we’re at all time highs on Nasdaq. We’ve only had the worst economic crash in the history of the planet…why wouldn’t the markets scream higher (max sarcasm).
Everyone reading this knows why it’s happened. The overwhelming, stupendous, magnificent and unrelenting power of central bank financial engineering. Our masters of the universe, doing their thing.
Already more than $10 trillion in combined global QE/debt/stimulus…not including the leverage employed (as much as 7:1, as used in Special Purpose Vehicles) have driven global equity markets into this record setting melt-up move higher. Following the onset of the financial crisis it took 4 years to get to the level of funny money they’ve just printed in 2 months. Love it or hate it, it’s enough to take your breath away.
A quick refresher of the last 4 months…
1) On 2/21/20…the day before coronavirus insanity kicked off….the Dow was trading at 29,000.
2) One month later (3/23/20) the Dow had collapsed 37% to 18,200.
3) Now, in just under 2 months, the Dow has gained 48% to Wednesday at 26,989.
4) Thursday’s 1,800 point loss on the Dow
Twilight zone market action. Anyone that claims to know what might happen next, they get the side-eye.
If we can take Powell and his band of brothers at the Fed at their word, zero percent interest rates are here with through 2022.
If only the Fed controlled rates. Alas, they do not.
As we have long made the case…back when the 10 year yielded better than 3% (most of 2018)…gravity is in control. Ask Japan about gravity. Ask Europe about gravity. We’ll be shocked if rates in the US don’t go negative.
Of course, this is why we own gold and the miners, the top-performing groups of 2020 (plus 13–15%), along with Bitcoin (+32%). Negative real rates are here to stay…little could be more bullish for PM’s, miners and BTC.
VRA Bottom Line: J Powell made it crystal clear that the US economy is in serious trouble. Millions will not have jobs to go back to. It will take years to overcome the damage from CV lockdowns. New ATH’s in nasdaq and a 48% move higher in the Dow Jones won’t solve our problems. In our view Powell purposely talked the markets down…it would be hard to add another $2 trillion in QE without at least some panic in the air.
We hit extreme OB on steroids. An 8–10% correction from here should surprise no one. Again, we’ll be watching our VRA bear market rally playbook keys; Oil, tech/semis, internals and smart money hour. Yes, we still believe short term pain lies ahead. We also believe it's likely the lows are in place and that we will look to cover our hedges over the next few weeks and then add to our long positions. For those watching intraday action, QQQ and SMH are the keys. The hardest hit groups (airlines, cruise ships, casinos, banks and retail) have had their bear market rally. Avoid these names. We are.
Chart of the Day (the most important chart to banks and to bankers at the Fed):
Below is the 3 year chart of EUFN (Europe Financials ETF), post negative interest rates throughout Europe. Long term, painful losses of 38%. Negative rates have made it impossible for European banks to make a profit. This is why the Fed, and central banks globally, will continue QE and almost certainly ramp it up further. They are boxed in…they have no choice.
The last thing US bankers want to see are negative rates…although it's almost a given that ongoing gravity in yields will take us there regardless. This is the deflationary battle taking place today. Banks must have “inflation”…which is why J Powell keeps talking about it, wishing for it. Deflation produces debt repayment issues. Debt repayment issues can lead to a death spiral for banks. Hence, QE must continue. Hence, asset prices (stock prices) will continue to be bid up by central banks.
Ideally, this correction will last a couple of weeks, followed by a wash out and some fear brought back into the markets. We would then look to buy that fear (just as the Fed comes rushing back with more QE).
Until next time, thanks again for reading…
Kip
Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 15/17 years.
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