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Show Me the Money! See the Market

US Commercial Bank data had been sending warning signals that all was not well for at least a year before the stock market crashed. I chronicled that in these reports.

The warning signals came to fruition in February and March.

But then the Fed stepped into the breach and went crazy. What the Fed did, and is still doing, went beyond “unprecedented.” It was nuts. As a result, banking indicators have now gone where no man has ever gone before. I mean, we are talking outer space, baby!

By these measures, the Fed is promoting even more of what caused the crash. Orders of magnitude more. I can’t pretend to know with any certainty what the ultimate effects of unprecedented actions will be. Unprecedented means that we can’t rely on history to guide us. It is now a matter of instincts, logic, and common sense.

And those things tell me that this experiment in massive monetary inflation will result in… yep, massive monetary inflation. But how will it be expressed? Asset inflation? Consumer inflation? Stock price inflation? Bond yield inflation? Dollar collapse? Gold to the moon? Bitcoin to a million? Oil to a thousand. Wheelbarrows of cash for a loaf of bread?

I don’t know, but I have my suspicions, and they lean toward more consumption goods inflation, weakness in the dollar, and especially weakness in bond prices, that will ultimately bring down the whole financial system.

But I can’t have a high degree of confidence in that outlook because we have no historical precedents. To bastardize Santayana and Berra,

“We cannot remember the past or repeat it because it never happened before, making it even more difficult to make predictions, especially about the future for which there’s been no past.”

Let’s see that make it to Bartlett’s.

So I look on in slack-jawed wonder at these banking indicators doing amazing feats of acrobatics. It’s like in the circus, with ringmaster Jaysus Powell leading a troupe of clown priests of central banking, dancing, leaping, doing pratfalls, honking their bicycle horns. Throwing peanuts to the chimps screaching in their wake.

That’s what the banking indicators look and feel like. The Fed puts on a show. It hands out free tickets to all. It rents empty arenas from the busted sponsors. Stock prices go through the roof. But real business investment crashes.

This craziness can’t end well I think. But I don’t know how, and I don’t know when. I just know that Ringling Brothers, Barnum and Bailey are dead.

But do we even need to guess the future? Forecasts are of limited usefulness even under conditions of relative clarity. What matters are trends, and the indications of trend change. Recognize where we are, and when things are changing early enough, and that’s all we need.

It helps to recognize when the conditions are ripe for change. That’s where indicators like these can be helpful. Current conditions are wildly different from anything we’ve ever seen. That in itself suggests that change is gonna come. We need to be alert for the first signs, so that we can get out ahead of the crowd heading for the exits.

These indicators, in themselves, won’t help us with timing. That’s a matter for technical analysis. We’re getting some hints that change might be coming to the bond market. I really don’t want to be long Treasuries or fixed income of any kind now. It just seems too risky given the near zero returns.

And I sure do not want to chase stocks now. The TA that I do every week for the Technical Trader reports suggests that upside is limited in the short run. Maybe there will be a good entry for a long term hold in the next correction. Maybe not. We’ll make that call as we see it.

As for shorting stocks, I don’t see that at the moment either. I posted a bunch of stocks with short term sell signals last week and got taken to the woodshed. Fortunately I had almost as many long signals. They ended up perfectly hedging each other to near zero. Goodbye profits.

Not good. I should have had better recognition of and respect for the bull. Bullish trends will drop lots of false sell signals along the way. It’s critical that we not argue with context. Thinking about Rule Number 2- “The trend is your friend,” aka “Don’t fight the tape.”

Regardless of how crazy it looks or feels.

After all, markets are just meters. They measure how much money is in the system, showing that as index price levels. All of the reasons that Wall Street gives for what the markets are doing are just excuses for the money meter. There’s no “reason,” in logical, human terms. It’s just the money. Banking indicators are another way of showing us the money. Show me the money! See the market.

The Fed and its sister central banks have created a whole bunch more money in a few short months than ever in the history of mankind. The money coursed through the markets and into the banking system. As the markets have risen, even more credit has become available to drive prices higher. And so on.

The dealers love the game. They’re playing it to the hilt, but they are overextended, and overexposed to the bond market. The Fed can’t afford to allow yields to rise, and bond prices to fall.

I’ll be interested to see in Wednesday’s FOMC statement if they say anything about pegging bond yields. Because to do that, they would need to print money to the moon. God help us if they do.

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Posted in 1 - Liquidity Trader- Money Trends, Fed, Central Bank and Banking Macro Liquidity
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