With so much propaganda surrounding the Fed’s decision to raise interest rates this week, a legendary short seller just warned it’s now “jokers wild” as the Fed is completely out of control.
By Bill Fleckenstein President Of Fleckenstein Capital
June 16 (King World News) – As longtime readers know, often when I am traveling the markets get wild, and last Friday was a good example of that. I think the huge break in the FANG stocks is most likely a meaningful development and it is an early-to-coincident sign that perhaps the market is finally exhausting itself…
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Wait, Wait, Don’t Sell Me
I know I have felt that exhaustion could be developing a few other times and it turned out not to be the case. That said, having a wrong thesis is pretty common in this business, so the important thing is not to try to force positions because of a hunch, but rather see if the thesis plays out and is corroborated. To that end, the subsequent action this week hasn’t negated the possibility of exhaustion, but we haven’t really seen anything to make me feel like a serious decline is ready to begin just yet. On that topic, I encourage everyone to look at Mr. Skin’s post in Ask Fleck today because he did a brilliant job succinctly summarizing where we are from a psychological standpoint.
Fed Balance Sheet At a Tipping Point
The other “big” news while I was on the road was the FOMC meeting, but as usual it didn’t amount to much, other than the fact that the Fed has now put a tiny bit of meat on the bones of its alleged plans to unwind its balance sheet. Of course, those plans are completely conditional, and even the Wall Street Journal — which tends to buy the Fed’s party line — made it quite clear in a front-page article yesterday just now tenuous said plans look to be.
The WSJ noted that, “the moves Wednesday marked the latest test of the economy’s ability to stand on its own as the central bank dials back stimulus measures.” They also wrote that the supposed additional rate hike will occur only, “if the economy performs in line with the latest forecast” [emphasis added].
The reason I bring this up is because there seems to be so much concern on the part of folks involved in the gold complex that the Fed will carry out various forms of severe tightening policies. That is not the case. I have discussed this quite a lot, so I don’t want to waste readers’ time by repeating myself.
Jokers Wild
Having said that, the Fed is so far out of control, and the financial environment is so warped, rates should be higher (due to market forces, not Fed policy), but that is an entirely different topic. We can’t invest based on where rates “in theory” should be. We have to play with the hand we have been dealt, and that is a Fed that has no real understanding of how its actions impact the economy and markets, and is now intent (though they wont be able to) on raising rates and shrinking its balance sheet as sort of a self-congratulatory strategy to show that the economy is “just fine,” thank you very much.
My friend Joanie summed it up well yesterday in her letter when she said:
“You might interpret yesterday’s swaggering performance from the totally inept Fed as damning the torpedoes and ordering full speed ahead. Possibly, then, you might be expecting a shipwreck as inevitable, which of course I do.”
As for today’s market action, the indices were initially weaker, though not materially. Beneath the surface there was a lot of motion caused by Amazon buying Whole Foods. Many have leapt to all sorts of conclusion about what this development will mean down the road based on todays market action, but to me the dislocation of Costco and Walmart, just to pick two examples, speaks more to market illiquidity than it does to a prediction of future outcomes. In the afternoon, the indices just drifted more or less sideways and closed with small changes.
As far as the start of a big down leg in the market, it will be important to pay close attention to indications that corroborate that the upside is finished, but until we get more data I plan to sit on my hands, ex a few small positions I have, just in case. Away from stocks, green paper was a bit weaker, oil was a nonevent, fixed income was a little higher, and the metals traded in small ranges and were about flat.
Another One Bits the Dust
On a related note, while I was about a week off in my expectation of a flameout in the Bitcoin parabola, my friend who has a better understanding of parabolas pretty much nailed it (see Ask Fleck on June 13). It does look like the party on the upside is now over, although I don’t know if that has ramifications for any other assets.
Included below are four questions and answers from the Q&A’s with Bill Fleckenstein.
Question: Shares of Amazon, up $31/share, adds roughly $15.2-billion in additional market-cap. This is the equivalent of 38-years’ worth of profits that the current Whole Foods earns based on its last quarter’s net income of $99-million. There’s some real life momentum, algorithmic variety of price discovery for ya.
Answer from Fleck: And they are paying about 14 billion using borrowed money, so now it’s like from a market cap standpoint they got it for free. 🙂
Gold
Question: Pardon the vent Bill, but if rate cuts were bearish for gold, why would rate hikes also be bearish for gold? In other words, is there one single thing that could happen on this planet that would be bullish for gold? Doesn’t seem like it…
Answer from Fleck: “I assume the freakout was over Janet’s plan to shrink the balance sheet, which she won’t be able to do. But for now, the attitude is sell gold first, ask questions later, it seems.”
The Fed’s Bloated Balance Sheet
Question: Fleck, No one cares about the Fed’s balance sheet. What am I missing? Does it matter if its $4 trillion, $10 trillion, $50 trillion? Why does it tangibly matter if the markets shrug it off?
Answer from Fleck: “It is all a fantasy, and at some point they will stop trying to shrink it.”
Question: Call me paranoid, but I feel Yellen wishes Trump ill will. After all, he is going to fire her inFeb.2018. This is a woman who sees the same frail economy as we all do. She reads the same reports we do. The Donald ranted during his campaign that rates are artificially too low. So I think she is giving him what he campaigned on and going against her better judgement and raising into an weak economy. But other then services,I don`t see inflation either. Color us Japan. Lower rates for longer then imaginable. Janet is sabotaging the Donald. Am I too paranoid? If I`m right, Gold will shine sooner rather then later.
Answer from Fleck: “She probably doesn’t like Trump, but she has misread the economy for ages… What’s new?”
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