Yesterday we looked at the overview of the CLI and the issue of new and secondary stock offerings. The CLI is still bullish. And the supply of new stock issues has not been sufficient to absorb enough of the demand to stop the advance of stock prices, although it has probably contributed to slowing the rise. Likewise, new corporate debt issuance, while massive, hasn’t been sufficient to pull enough of the demand for securities to cause a reversal of the rise in stock prices.
In this Part 2 of the report, I cover the remaining interesting and important indicators that comprise the CLI. Each has its own story to tell, but they all lead to the same conclusion. Still bullish, and, unbelievably, one key component says that the stock market is oversold.
I find it difficult to wrap my head around that. But I won’t argue with it. If there’s one thing I’ve learned in 53 years of watching markets virtually every day, it’s not to argue with impartial indicators. They don’t care what I think should happen. They just show what is happening.
So here we are. The Fed is creating enormous amounts of excess liquidity, “liquidity” being a fancy word for “money.” I use the words interchangeably.
The Fed is creating that excess by pumping money directly into the markets via its POMO operations—buying bonds from Primary Dealers and paying for them by crediting the dealers’ accounts at the Fed with newly imagined money. That leads to secondary effects of increasing money in the system via credit growth, particularly increasing margin credit that results from rising securities prices.
This works, and will continue to work, for as long as the players have enough confidence in the game to keep buying. This keep pushing prices higher, increasing the value of collateral. That, in turn, allows for and promotes ever more credit creation. It’s the quintessential nature of bubble finance. Circular, and more. Always more.
There are those who say that this isn’t sustainable. There are also those who say that an expanding universe isn’t sustainable, that it will collapse in on itself.
In a few trillion years.
I’m agnostic about whether this must finally end in collapse within the foreseeable future. I assume that it will, but I sure as hell don’t know when. So I’ll just operate in the here and now, and respect the trend. We’ll always be alert for signs of change, but at the same time, never forgetting Rules Number One and Number Two.
Don’t fight the Fed.
The trend is your friend.
Meanwhile, as Yogi said, you can observe a lot by watching. I’m confident that by always being vigilant, and open to anything, we’ll be ready just in time to take advantage of, or at least protect ourselves from, whatever is to come.
Now to the indicators.
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